Plexus Capital, LLC

1. Plexus Capital, LLC An Intricately Interwoven Combination of Elements or Parts in a Cohering Structure Capital Choices for Private E & P Companies It Is Out There But How do I Choose? August 10, 2006 Wayne Williamson 1560 Broadway, Suite 1950, Denver, CO 80202 www.PlexusCapital.com (303) 225-5298

2. Plexus Capital, LLC • Formed to design and source conforming and alternative financing structures, minimizing the cost of capital for oil and gas producers • Will assist the producer in determining its capital requirements and advise alternative solutions for accessing it • Will assume lead role for transaction to expedite execution and allow producer’s management to continue to focus on current business • Determine cost of capital and help producer decide what risks to keep and what risks to transfer to least expensive holder of the risk • Through years of experience on both sides of the table (provider and producer) we can anticipate and structure the deal to avoid future potential problem areas Plexus Capital, LLC

3. Sources of E&P Capital • Private Markets • Commercial banks • Vendors (well service, seismic, pipeline companies) • Individuals • Industry partners • Private institutions (direct or through fund managers) • Insurance Companies • Utilities Plexus Capital, LLC

4. Understanding Cost of Capital • Weighted Average Cost of Capital • Conforming bank debt (coupon, front end fee, commitment fee, admin fee) • Sub debt (coupon, front end fee, commitment fee, ORRI, warrants, back-ins) • VPP (discount utilized for calculating purchase, additional spread on hedges) • Preferred Equity (coupon, expected equity growth rate) • Equity (new equity or current owner’s equity/valuation) • Need to consider term (floating vs fixed), front end fees • Subjective values: • Transaction closing risk • Speed of execution • Future availability of capital from funder • Call on additional capital Plexus Capital, LLC

5. Cost vs Risk Plexus Capital, LLC

6. Risk and Who Bears it Affects Cost of Capital Plexus Capital, LLC

7. Conforming Debt Attributes • Advance 50% – 75% (60% - 65% is typical) risked proved PV10 at higher of bank pricing or hedge price • Senior secured • Payout within half life of reserves • Maximum term 8 years • Coupon at Prime or Libor + 100 to 300 • Borrowing base review 2 times per year • Proved non producing limited to 20% of borrowing base • Single property no more than 15% of value • Single bank hold limit $25MM - $50MM Plexus Capital, LLC

8. Private Mezzanine Attributes • Limit total debt to 100% PV10 PDP at higher of institution pricing or hedge price • Subordinated secured, requires inter-creditor agreement with senior lender • No corporate governance issues • Covenants similar to senior debt • Cost from Libor + 400 to 25% total cost of capital including ORRI or other equity kickers • May allow a portion to revolve • 1-2 months to complete financing Plexus Capital, LLC

9. Private Equity Attributes • Investment focus is on management • 3-7 year investment time frame • Active corporate governance, board representation, control • Management receives 10-50% back-in after 8-25% IRR • Meaningful investment from management • 3-6 months to complete financing Plexus Capital, LLC

10. Debt Combinations • Senior secured with a tranche B (Lender A): No inter-creditor issues. Tranche B could revolve, pay more expensive debt off first. • Senior secured (Lender A) with subordinated secured (Lender B): Inter-creditor issues (Lender A and B not necessarily aligned). Can pay off more expensive debt first. • Senior secured mezzanine: Blended cost of capital. Cannot reduce average capital cost until take out of facility. • VPP: Same issues as senior mezzanine, but recourse limited to specific properties. Eliminates margin calls on hedging. More difficult to unravel cost of capital (hedge spreads, marketing risk spreads, discount rate). Need to understand cost of under-delivery. • SPE with combinations above: Limits enterprise risk to specific properties for lender. No inter-creditor issues with corporate lenders. Ring fences capital partner within specific properties, so risk attributes can be tailored to different capital providers. Plexus Capital, LLC

11. Example of Recent Unusual Transactions

12. Financing Structure Funder Swap Counter-Party(s) Credit Support Secured Loan Mortgage Commodity Price Hedge Interest Rate Swap Property Producer Producer SPE Insurance Company Subordinated Note Financial Guaranty Cash Purchase Price Guaranty Fee Plexus Capital, LLC

13. Structure Benefits for Producer • Can convert ordinary income to long term capital gain (1031 option) • Lock in historically high commodity prices without risk of margin calls • Potentially higher advance rate than conforming commercial bank loan • Financing is recourse only to subject properties • No inter-creditor issues • Diversifies capital structure • Producer retains all property upside • Vehicle for wealth transfer in estate planning Plexus Capital, LLC

14. PV Tax Savings for Various Reserve Profiles Note: Compares 15% capital gains rate to 35% ordinary tax rate. Plexus Capital, LLC

15. A Few Pearls • Create competition for your transaction • Don’t assume a lender will not be interested in your type of transaction • Ping as many lenders as you can, then focus on the 2 – 5 best fits • Try to convince lower risk/lower cost lenders to move up the risk spectrum • Lenders with minimum return will not accept lower return, regardless of lower risk • Possible to get lenders to accept more risk for slightly higher return • Find out what the lender’s return criteria is and what they value Plexus Capital, LLC

16. A Few More Pearls • Identify your assets/attributes (what you have to give) and find the lender that values them • Other non-producing assets to pledge or value (seismic, equity in other enterprises, equipment, commitment of equity from VC) • Geographic concentration of production • Analyze and measure the risked value of your assets so the lender understands • Always negotiate a detailed comprehensive term sheet • Reduces legal cost • Insures you have a deal before you invest too much time and legal costs to walk away • Get senior lender to provide additional margin facility for hedging with non bank counterparties or have at least two banks/counterparties in facility for competitive hedges. Plexus Capital, LLC