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Investing in Growing Oil and Gas and Midstream Energy Companies
Presentation to the IPAA Private Capital Conference
January 19, 2006
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GasRock Capital LLCGasRock Capital LLC
Development drilling projects and midstream gas
“Mezzanine” debt with royalty or other participation
Start-ups to large companies
Engineering risk rather than exploration
$5 to $50 million +
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Investment FocusInvestment Focus
Oil and gas development drilling projects and acquisitions– Typically at least a small amount of PDP reserves to start– Substantial PDNP and PUD development opportunity– Some types of exploitation (Probable) may be acceptable– Very low risk PUD development projects may not require initial PDP
Midstream gas– Gathering, processing, pipelines– Other toll based business
KnowledgeFocus
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Targeted Risk ProfileTargeted Risk Profile
TargetInvestments
Low High
100% 0%
PDP PDNP PUD
Development
ExplorationExploitation
ProvedProbable Possible
Unproved
Reserve Risk Spectrum
Confidence
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What We WantWhat We Want
Usually some PDP Initial collateral value comparable to first advance Exceptions for some projects like coal seam gas
Development project risk Significant PUD drilling opportunity; not exploration Also mid-stream gas assets
Total return: more than bank debt, less than equity Coupon usually 9% to 11% Royalty in adequate size to reach target return, based on risk
Some owner / sponsor investment Needs to be significant to the individuals, not to the project
Lien on the assets Typically first lien; will accept second lien in larger deals
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What You GetWhat You Get
Early stage capital No fixed minimum equity investment Focused on quality project, not long track record
Fast growth Substantial development capital Much larger and faster advance than bank
Non-recourse Debt and liens in project company only Other assets/projects unencumbered
Control Generally no sale of equity (e.g. majority) No board seats or control of acquisitions or divestitures
Nearly all of the upside GasRock usually keeps ORRI only After debt paid, nearly all cash flow reverts to sponsor
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Typical Investment StructureTypical Investment Structure
First lien debt
Coupon
ORRI
Advances
Repayment
•Pay off any other debt with proceeds•Lien on all assets in the project
•Usually 9-11%•Floating rate with fixed minimum rate•Current pay; will consider funding early coupons if needed
•Royalty sized as required to meet target return•Sizing based on project economic model•May begin immediately or after loan repaid
•Based primarily on PDP value•May equal or exceed PV10•Typically sponsor pays for leases, seismic•Proceeds applied to approved development plan
•“Sweep” of cash flow to pay interest and principal•Typically 80%-90%•Structured to accommodate overhead•3 to 4 year maturity•Early repayment allowed; no penalty
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Benefits of Project / Mezzanine FinanceBenefits of Project / Mezzanine Finance
Accelerated Funding
• Often two to three times bank advance
• Faster increase as wells come on
• Much faster project growth
Accelerated Funding
• Often two to three times bank advance
• Faster increase as wells come on
• Much faster project growth
Reasonable Cost
• Higher than bank debt; lower than equity
• Applies only to specific project assets
• Prepay at any time
Reasonable Cost
• Higher than bank debt; lower than equity
• Applies only to specific project assets
• Prepay at any time
“Project financing allows companies to grow rapidly without giving up a big share of their economics or
control of their future.”
“Project financing allows companies to grow rapidly without giving up a big share of their economics or
control of their future.”
+
Retained Control
• No sale of a share of ownership
• No board seat
• No control over sale of company, IPO, etc.
Retained Control
• No sale of a share of ownership
• No board seat
• No control over sale of company, IPO, etc.
+
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Choose Experience and KnowledgeChoose Experience and Knowledge
Our four transaction leaders average 24 years of experience
Engineering knowledge results in speedy evaluations
– Greater surety of closing, without change in terms
Appreciation of potential results in
– Aggressive terms
– Patience for results
Experience helps in crafting unique structures tailored to specific needs
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Choose People You Can TrustChoose People You Can Trust
Project financing is relatively hands-on
– Pick someone you can live with
Shared perspective from history working on behalf of operators
Reasonable and balanced approach
Reputation for persistence and creativity
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How We Are DifferentHow We Are Different
Ability to start small (under $5 million)
– Yet can grow large ($50+ million)
Long on energy deal experience
Creative, responsive, and quick
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Portfolio CompanyPortfolio Company
First GasRock Deal
Closed in 28 days
Initial funding about one-third
Balance for development
– Workovers
– Recompletions
– Drilling
Miller Energy LLC
$30,000,000
Advancing Credit Facility to Miller Petroleum Partners, L.P. to refinance acquired North Texas assets and fund accelerated exploitation. Provided by:
October 2005
Miller Energy LLC
$30,000,000
Advancing Credit Facility to Miller Petroleum Partners, L.P. to refinance acquired North Texas assets and fund accelerated exploitation. Provided by:
October 2005
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Case Study: Mythos, Inc.Case Study: Mythos, Inc.
Owns a largely undeveloped field
Type Well:– Net reserves: 572
MMCF
– Cost to drill: $650k
– R/P ratio: 8.5
– Life: 25+ years
– IRR: 35%
– ROI: 4.5
– Payout: 2.5 years
Type Well Gas Production
0
50
100
150
200
250
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Years
MM
CF
per
Day
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Case Study: Mythos, Inc.Case Study: Mythos, Inc.
Some PDP
– 3 wells drilled so far– PV10: $4.4 million– Production: 400 MCFD
Undeveloped acreage
– 72 locations– 42+ BCFE net reserve potential– $47 million, two-year drilling program
Project Economics
– Field level IRR: 37% develop and hold
76% develop and sell– Sale price: $87.4 million in 30 months
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Mythos: Options for GrowthMythos: Options for Growth
Bank debt
Industry joint venture
Private equity
Mezzanine
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Mythos: Bank DebtMythos: Bank Debt
7% interest rate
Advance equals 60% of PDP
Semi-annual borrowing base re-determination
Slower drilling
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Mythos: Industry PartnerMythos: Industry Partner
One eighth carry through all 72 wells
Carried on all CAPEX (“to the tanks”)
No constraint on pace of drilling
Partner IRR is 31%
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Mythos: Private EquityMythos: Private Equity
Raise $20 million of institutional equity
Plus a little bank debt
Mythos contributes PDP for 14% of equity
PDP valuation at $8000 per mcfe/d of production; $2.34/mcf
Mythos can ‘claw-back’ to 34% of equity
Assumed sale after 30 months
Results in equity investor IRR 50%; ROI 3.4
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Mythos: MezzanineMythos: Mezzanine
$47 million facility
10% coupon
5% ORRI
2% advance fee
90% sweep of field profit
Mezzanine earns 18.5% IRR
– ROI is 1.5 over 4.5 years without sale– 23% IRR with sale in 2.5 years
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Case Study: Results to ManagementCase Study: Results to Management
Private Equity
Mezzanine
Industry Partner
Bank Debt
$5 $10 $15 $20 $25 $30 $35 $40 $45 $500%
20%
40%
60%
80%
100%
120%
140%
NPV 10% to Mythos ($mm)
IRR
to
My
tho
s
Size of circle indicates Mythos return at year 3 exit
$26 million
$58 million
$22 million
$16 million
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Case Study: Sharing the ProfitCase Study: Sharing the Profit
Management retains a larger share of the profit with mezzanine financing as compared to alternatives.
Mg
mt.
Mg
mt.
Mg
mt.
Mg
mt.
Eq
uit
y F
un
d
Bank
Par
tner
GasRock
$0
$10
$20
$30
$40
$50
$60
$70
$80
Bank Debt Industry Partner Private Equity Mezzanine
Pro
fit (
$mm
)
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Management Profit versus Gas PriceManagement Profit versus Gas Price
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
$4.
50
$5.
00
$5.
50
$6.
00
$6.
50
$7.
00
$7.
50
$8.
00
$8.
50
$9.
00
$9.
50
Gas Price
Pro
fit
PE
Mezz
Industry
Bank
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Management Profit versus Production ResultsManagement Profit versus Production Results
$-
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
50% 60% 70% 80% 90% 100% 110% 120% 130% 140%
Production as a % of Forecast
Pro
fit
PE
Mezz
Industry
Bank
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SummarySummary
Accelerate funding and development
Avoid dilution of equity ownership
Maintain control
Capture a larger share; finish strong!
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ContactsContacts
1 Houston Center1221 McKinneySuite 3180Houston, TX 77010-2026
713-300-1400Fax 713-300-1401 www.gasrockcapital.com
• Frank M. Weisser 713-425-7052 [email protected]
• Scott W. Johnson 713-425-7051 [email protected]
David R. Taylor 713-425-7053 [email protected]
• Marshall Lynn Bass 713-425-7056 [email protected]
HoustonHouston
