NON-OPERATED OIL & GAS INTERESTS:

BUILDING & FINANCING A PORTFOLIO

JAY G O L D FA R B, P H . D.

W O O D B R I D G E O I L & G A S A DV I S O R S M AY 2 2 , 2 0 1 2

Agenda & Presenter

AGENDA:

1. Introduction 2. Capital Sources 3. Illustrative Economics 4. Summary/Conclusions 5. Contact PRESENTER:

Jay Goldfarb, Ph.D. is President of Woodbridge Oil & Gas Advisors 1, an investment banking firm specializing in the sale of upstream oil & gas properties. Jay has assisted his clients with the execution of more than $1 billion of acquisition, divestiture and financing transactions throughout North America, including numerous Bakken projects. Prior to joining Woodbridge, Jay was a Vice President at Mesirow Financial, a Chicago-based boutique investment banking firm. He holds a Ph.D. in Chemical Engineering from the University of Massachusetts at Amherst.

1 Securities offered through Woodbridge Financial Group, LLC. Member FINRA, SiPC

Single Well Economics – Participating vs. Selling Undeveloped Core Acreage

Rates of return from drilling in core areas are too extraordinary to forego for lack of funding

 Bakken development activity is challenging the non-operated working interest owner’s ability to finance participation  Selling undeveloped core acreage will capture only a fraction of the potential returns available from participating

SINGLE BAKKEN WELL ASSUMPTIONS AND ECONOMICS

Gross EUR (Mboe) Realized oil price ($/bo) Realized gas price ($/mcf) NRI (%) Completed well cost ($)

After Tax NPV-10 (assume 35% tax rate) ($) ATAX IRR

585.5

75.0

5.0

80.0% 8,000,000

7,228,666 46.5%

 The market for undeveloped acreage demands a seemingly high rate of return compared to risk

UNDEVELOPED CORE ACREAGE FOR ONE WELL

Well spacing (acres) 320 Market value ($/acre) 5,000 Market value ($)

After Tax $ (assume 35% tax rate)

1,600,000

1,040,000

NOTE: The examples contained in this presentation are for illustrative purposes only . You should consult with appropriate experts to evaluate specific investment opportunities.

Opportunities and Challenges of Non-Op Oil & Gas Interests

Non-operated interests are essentially financial assets. Managing these assets consists of choosing the structure and timing for a series of financing and divestiture transactions. Effective planning and decision analysis supported by financial modeling is essential for maximizing value.

Opportunity

• Extraordinary ( 40 to 100%+) rates of return available from participating in drilling on the leases • Upside potential from re-fracs, increased density and secondary targets, particularly the deeper Three Forks benches • In the core area, no geological risk; development risk is quantifiable

Financing is a challenge

• Up-front investment • Limited production = limited borrowing capacity • Rapid drill-out accelerated by pad drilling, walking rigs

Keys for Success

• Effective use of leverage – Match to assets, IRR, timing of cash flows • Support decisions with engineering data and financial analysis • Financial model, capitalization and exit plan

Elements of a Successful Plan

The plan is the Roadmap for the transformation of a portfolio of undeveloped working interests to cash. It provides support for decision analysis related to potential financing and divestiture transactions.

Investment Objectives

• Capital willing to risk • Expected return • Risk/Return proposition – growth and exit • Define acceptable risk

Essential Plan Elements

• Development plan • Cash flow forecast, external funding and contemplated progression of financings • Return on equity • Hedging/risk management – what is comfort level with oil prices and reserves • Engineering and reserve report

Capital structure, Risk and Pricing

Understanding the capital markets is essential for managing these assets. The market provides a spectrum of products to suit the capital requirements and associated risk.

Risk Type IRR Objective Capital

Parameters

Engineering Risk Exploration Risk 5% 10% 20% 35% 50%+ Proved Producing Proved Non-Producing Proved Undeveloped Probable Producing Proved Undeveloped Proved Undeveloped Senior Bank Debt

~60% of PDP Small % PDNP/PUD

Mezzanine /Sub Debt

Development expected to cure loan to conforming bank debt within 12-18 months

Wildcat Equity

No proven reserves, limited probable reserves

Economics of Mezzanine Financing for a Single Well

Mezzanine Lenders seek 18%+IRR with typical two year minimum term. The cost of this capital should not be a barrier as the typical Bakken well pays out the loan by maturity.

Illustrated for the first two years production, a typical mezzanine maturity SINGLE WELL INCOME STATEMENT

Production (Mboe) Revenue Operating expenses Production taxes Depreciation and amortization Mezzanine loan interest and fees Income before tax Taxes @ 35%

Net Income Cash Flow Statement

Net income Depreciation & amortization Cash from operations CAPEX Mezzanine loan advance

Change in cash FIRST TWO YEARS ($MM)

230 15.6

(0.2) (1.7) (5.1) (3.0) 5.5

(1.9)

3.6

3.6

5.1

8.7

(8.0) 8.0

8.7

SINGLE BAKKEN WELL ASSUMPTIONS AND ECONOMICS

Gross EUR (Mboe) Realized oil price ($/bo) Realized gas price ($/mcf) NRI (%) Completed well cost ($mm) 585.5

75.0

5.0

80.0% 8.0

NET ASSET VALUE AT END OF YEAR TWO

PV-10 Cash from operations Mezzanine debt NAV

($ millions)

6.9

8.7

(8.0) 7.7

Initial Development Funded with Mezzanine, Refinanced with Senior Debt

Mezzanine lenders may finance 100% of development expenses with no starting production on the leases. Production generates borrowing base to refinance with less expensive senior debt.

UN-LEVERED CASH FLOW ($ 000's) Net wells (EOY) BTAX operating cash flow TAX CAPEX Unlevered cash flow YR1 10 40,159 (80,000) (39,841) YR2 20 95,168 (16,309) (80,000) (1,141) YR3 30 119,722 (22,903) (80,000) 16,819 YR4 30 96,558 (27,795) 68,763

Total

30 351,606 (67,007) (240,000) 44,600 DRILLING FUNDED WITH MEZZANINE LOAN REFINANCED BY SENIOR DEBT AT END OF YR2 BTAX operating cash flow Interest Tax CAPEX Change in cash Mezzanine debt draw (18% ROR) Mezzanine debt paydown Senior debt draw (6% ROR) Senior Debt paydown Net Debt Cash (80,000) 40,159 (14,400) (54,241) 80,000 54,241 95,168 (14,400) (5,284) (80,000) (4,516) (80,000) 59,000 58,758 119,722 (4,130) (21,457) (80,000) 14,135 (14,000) 44,623 (26,693) 96,558 (3,150) 66,715 (45,000) 351,606 (36,080) (53,434) (240,000) 22,092 80,000 (80,000) 59,000 (59,000) 22,092 • • • • Mezzanine finances initial drill-out @ 18% ROR, minimum 2 yr. duration (1.4x return) Refinanced with senior conforming loan, advance rate less than 60% of PDP PV-10, at end of year 2 Further drilling could be funded with senior debt and cash flow Need for mezzanine is limited, cost of capital is a blend of mezzanine and senior rates

Summary Economics

In this example, 100% of the external capital requirement is funded with debt, resulting in significant value creation relative to the cost of capital. Upside is retained.

CASH FLOWS ($000s) After tax cash flow Interest Tax savings - interest deduction After tax interest expense NET ASSET VALUE ($000s) Undeveloped acreage @ $5000/acre Cash PV-10 production NAV UN-DISCOUNTED 314,304 36,080 12,628 23,452 PV-10 126,154 30,246 10,586 19,660 UNDEVELOPED 48,000 48,000 DRILLED-OUT YR4 22,092 164,676 186,768 POTENTIAL UPSIDE Refracs and increased density Deeper Three Forks Benches Change in Reserves 50% 100% Bo 7,500,000 15,000,000

Summary and Conclusions

Summary  Rates of return from drilling in core areas are too extraordinary to forego for lack of funding.

 Mezzanine loans is an alternative to equity and may finance 100% of development costs is proven areas with attractive economics.  Mezzanine loans can be refinanced with less expensive senior, reserves based lending. Reserves based lending and cash flow will be available to finance subsequent development. Hold or Sell?

 The market for undeveloped acreage appears to demand equity returns inconsistent with risk, particularly when considering the potential upside.  Notwithstanding the upside, buyers for production will accept lower returns, limiting the attractiveness of holding. Further, the benefit of holding production is offset by the tax arbitrage between ordinary income and capital gains.

Upstream oil & gas asset acquisitions and divestitures

CONTACT: J AY G O L D FA R B , P H . D .

W O O D B R I D G E O I L & G A S A D V I S O R S 8 4 7 . 6 6 8 . 8 4 7 2