Transcript Table of Contents
Wells Fargo Energy Capital
Michael Nepveux Senior Vice President
Presented to: IPAA Capital Markets Seminar
January 16, 2008
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Who is the Wells Fargo Energy Group?
Quick Facts:
• Over three decades of lending to the Energy industry • 105+ staff members in Houston, Dallas and Denver • Our clients have revenues from $10MM to $50B+ • Broad product offering including senior debt, mezzanine
debt, private equity, commodity and interest rate derivatives, and treasury management.
• The mission of the Wells Fargo Energy Group is to be the
bank of choice for all segments of the energy industry Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Who is Wells Fargo Energy Capital?
Quick Facts:
• Headquartered in Houston with representatives in Denver and
Pittsburgh
• 11 professionals on staff • Over $1B committed to the mezzanine finance sector since 1996 • In 2007 completed 43 deals totaling over $300MM • Funds provided for development drilling; highly leveraged
acquisitions and bridge facilities
• Make select equity investments in sponsored funds and private
companies Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Wells Fargo Energy Group
Refining & Petrochemicals 10% Exploration & Production- 40% Pipelines, Gathering & Processing- 20%
$8.5B
Energy Services & Equipment- 30% Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Where Do We Fit in the Development Cycle?
Production Subordinated Debt, Equity Syndicating Senior Revolver Senior Revolver Development Loan, Equity 5 Start-Up Development Acquisition Development Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Oil and Gas Industry Risk Spectrum
(including sub debt and development loans) 6 Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Definition of Mezzanine Debt
Mezzanine (m ĕz ‘ ə-nēn) n. [from Latin,
medianus
middle, median]: An intermediate story, usually not of full width, between two main floors, especially the ground floor and the one above it.
Energy finance translation: a middle layer of capital, typically supported to a material extent by undeveloped reserves, with equity beneath and sometimes senior debt above; not meant to be a permanent or primary source of capital.
Good solution for companies who:
Need capital to acquire and/or develop undeveloped reserves Require more capital than commercial banks will provide Don ’ t want to sell or bring in an industry partner Want to avoid ownership dilution inherent in raising equity capital
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Mezzanine Debt Market
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Started in early/mid ’80s with TCW and RIMCO Numerous players have come and gone since then (Enron, Aquila, Williams, Shell Capital, Mirant, etc.) After Enron and merchant sector collapse, only TCW and WFEC remained active Numerous new players today (BlackRock, GasRock, Macquarie, NGP Capital, PetroBridge, Guggenheim, RBS, Goldman, Prospect, etc.) Hedge funds are also now active, but more selective in recent months Competition has driven returns down and increased risk Advantages of mezzanine debt versus: Bank Debt
higher advance rate accelerates reserve development limited or non-recourse (projects)
Private Equity
less expensive less control easier to amend or increase
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Typical Mezzanine Structure and Pricing
Project Debt Secured with first lien $3MM - $50MM Fund development/acquisition of proven reserves Bridges to conforming bank debt if reserves not sold 1-3 year maturity IRR: 15% - 25%: Coupon Rate: 10% - 12%, ORRI < 5%, APO NPI 15% - 75%, warrants possibly Cash Sweep: 75% - 95% Runs deposited in a cash collateral account Commodity hedging typically required
Subordinated Debt Secured with second lien $10MM+ Fund development/acquisition of proven reserves; refinancings; recaps.
Advance Rate: senior + sub = up to 75% of NYMEX PV10% Maturity set 6-12 mos. after senior maturity IRR: 10% - 15% in the form of coupon; usually no equity kickers Cash Sweep: no Commodity hedging usually required Typically no borrowing base; protection via asset coverage test (NYMEX PV10) Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Mezzanine Advantages vs. Conforming Bank
Mezz shops take more reserve risk than commercial banks Smaller equity contribution required Higher advance rates than commercial banks Accelerate funding and development Typically non-recourse
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Mezzanine Advantages vs. Private Equity
Retain greater portion of the upside
Cheaper way to finance a proved drilling program
Maintain control
Easier to exit
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Second Lien Market Domino Effect
As the subprime spiral spread, it affected the investment firms that managed them and the hedge funds and other investors that bought them When liquidity dried up arrangers were sitting on immense underwriting positions which created an overhang in the debt markets This liquidity squeeze pushed the entire market into price-discovery mode and substantially increased risk aversion High yield market “impaired but operational” – Treas. Sec. Paulson last week. Volumes down sharply, spreads wider.
Oil and Gas 2 nd Lien and mezzanine not immune. Markets are open, but at wider credit spreads, reflecting investor appetite and liquidity.
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Market Trends
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Providing SOLUTIONS.
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Market Trends
High Yield Credit Spreads: 01/02/02 - 01/10/08
1200 1000 800 600 400 200 0 01/02/02 10/03/02 07/05/03
HY
Source: Bloomberg
04/05/04 01/05/05 10/07/05 07/09/06
IG
04/10/07 01/10/08 650 600 550 500 450 400 350 300 250 200 150 100 50 01/01/07
Source: Bloomberg
High Yield Credit Spreads: 01/01/07 - 01/10/08
02/16/07 04/04/07
HY
05/21/07 07/07/07 08/22/07 10/08/07
IG
11/24/07 01/10/08
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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Contacts
Mark Green
President 713-319-1327 mark.m.green@ wellsfargo.com
Gary Milavec
Senior Vice President 724-942-5839 [email protected]
15 Chris Carter
Vice President 713-319-1369 [email protected]
Michael Nepveux
Senior Vice President 303-863-5589 [email protected]
Developing RELATIONSHIPS.
Providing SOLUTIONS.
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