DRILLERSAND

DEALERS

ISSUE 5

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Executive Q&A

With JW Vitalone,

Senior Vice President,

Investment Banking,

Oberon Securities

Talking with Ross Stewart Campbell, CEO, The Oil Council

Date: 11th

May 2010

Ross Stewart Campbell (RSC) from The Oil Council: JW, many thanks for joining us to share your thoughts on today’s markets. To cover off introductions first can you quickly introduce Oberon Securities and your position within it? JW Vitalone (JWV) from Oberon:

Oberon Securities is a New York-based investment bank that works with small and mid-sized companies across a broad range of industries by providing capital formation and M&A advisory services, and assists in obtaining financing through privately

placed equity and debt. The entrepreneurial spirit on which Oberon was founded nearly ten years ago also serves as the basis for our approach of working closely with each individual client to partner with them and create financial solutions that will best help achieve its unique financial or strategic objective. RSC: Looking first JW at the current state of play with oil and gas investment banking, we endured a torrid time in 2008-2009 followed by a record year for many banks and financial service providers in 2009-2010. What is the general sentiment of oil and gas bankers in the US today? It is one of optimism, cautiousness, or, dare we say it bullishness?

JWV: As you point out Ross, 2008 – 2009 was a

torrid time for both capital seekers and providers characterized by a rapid decline in market liquidity and the sharp drop in commodity prices. And as you know that led to a good deal of discussion concerning the possibility of a severe and prolonged contraction in global economic growth and the demand for oil and gas. Those markets subsequently began their recovery as those concerns became less immediate.

As to your question I think oil and gas bankers today are generally optimistic but even so I think it‟s an optimism that might best be considered as „guarded‟. The banker that sees the longer-term oil and gas supply-demand outlook influencing a positive operating environment for oil and gas companies is likely to regard itself as optimistic. However, that banker probably regards the post-recovery financial markets as unsettled and recognizes that the recovery in commodity prices has more or less been the result of improving oil prices with natural gas prices improving less so in the context of increased volatility. In the current environment the banker is likely to guard its longer-term optimism by taking a more selective approach on a near-term basis to its deal participation. RSC: Reflecting on the past twelve months JW do you think the role (and responsibility) of an energy investment banker has changed in any way following the crises? JWV: I‟m not sure the role of the energy banker has

necessarily changed over the past year. Like all investment bankers their role takes on a number of different roles with their client during the course of completing a transaction. However from our recent experience I‟d say some roles are being taken on more frequently. The role of advisor seems to have defaulted to the top of our list. This has resulted from a higher than usual level of constant communication with clients revisiting deal strategies and their likely outcomes, or involving the preparation of responses to an increasing number of additional questions posed by investors/lenders to requests for more detail concerning the information our client has provided. Broadly speaking I think the role of advisor will continue to dominate all others until the capital markets renew their previous comfort with risk. On the other hand I‟m not sure that an investment bank, especially one interested in being successful, will regard its responsibility as something to be

“I think it‟s an optimism that might best be

considered as „guarded‟.”

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dialled up or down although I suppose some may feel it appropriate to expand or shrink the list of those it regards as having a responsibility to based on the particular circumstances at the time. Let me add that here at Oberon there has been no change to rather high responsibility bar we set when we fist founded the company. RSC: Many analysts commented that the crises removed a number of oil and gas companies from the marketplace that were not built on viable business models and strong management teams. Does the same hold true for energy investment banking? Have the strongest banks/advisors survived; those with the greatest depth of expertise, most diverse business offerings and strongest client relationships? JWV: I think there‟s little doubt that to be a

successful company regardless of the industry requires a viable business model that a strong management team executes well. So yes both would also be characteristic of any successful investment bank. However just as important to the investment bank‟s success is its depth of expertise and strength of client relationships because they speak to the essence of the trust and confidence that its clients and the markets will repeatedly look to. Just as the inefficiencies of certain poorly run companies tend to be obscured by the veil that periods of consistently higher oil and gas prices will provide, periods of “irrational exuberance” can provide the same cover for those poorly run financial service companies. A subsequent crisis or sustained business downturn will have the effect of lifting that cover exposing each industry‟s poorly managed organizations and their inefficiencies. However for investment banks lifting the curtain is likely to also reveal a misplaced trust and confidence. RSC: What should an oil and gas company look for in their financing partners/advisors? JWV: That‟s a great question Ross but also one that

is hard to answer because when all is said and done it‟s the relationship that is established between the oil and gas company and its investment bank that will account for much of a successfully completed capital raise.

What I‟ve found particularly interesting is while it is easy to get management teams all nodding in agreement with that premise, there‟s a good chance there‟s no agreement on what criteria it should consider to determine whether the desired relationship with a particular bank is possible. But because the situation, objectives and financing goals will be unique to each company, rather than offering a list of things to look for in their banker, I can suggest that any company will find helpful clues by listening carefully to information the banker gives about itself and the things it considers important to being a valued partner.

And I can suggest with great certainty that it‟s virtually impossible for any oil and gas company to get an appreciation for the relationship it will have with its banker if the company‟s most important criteria are how that banker compares relative to others and the time the bank suggests it will take to complete the deal. RSC: Moving onto current market dynamics and trends JW, you work internationally but with a large focus on The Americas, what financing trends have you seen emerging in the past 6-12 months, particularly for (i) medium-large independents, and (ii) smaller independents? JWV: I think we‟ll need to see a few more data

points before we can be certain of any particular trend emerging. Our target market is focused on the smaller independents where more often than not when engaged to assist with a capital raise the strategy we present to our client will likely have been strongly influenced by its profitability, balance sheet and existing cap structure. However, considering the general nature of our more recent strategies we have tended to not include reserve-based loans as a possible source of funds because of lenders‟ present level of risk-aversion and the more conservative LTVs now being applied to reserves across all categories. RSC: With regards to demand for capital and supply of capital, is there enough money to go around currently? JWV: Our recent experience involving a couple of

capital raises for small independents would suggest there is. However it also suggested getting an investor [or lender] to part with their money is a

“I think the role of advisor will continue to dominate all others until the capital

markets renew their previous comfort with risk.”

“However for investment banks lifting the

curtain is likely to also reveal a misplaced trust and confidence.”

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different matter as many capital providers continue to approach new opportunities in the context of a relatively lower tolerance for risk. So even though sufficient liquidity exists to fund capital needs, an oil and gas company preparing to tap the capital markets will need iron-clad reserve reports and financials, a well-articulated business strategy backed by a management team capable of executing it, plus a fair amount of patience for the added time needed with more extensive due diligence. RSC: Looking at the companies who have successfully raised capital [and done so with favourable T&Cs] do they exert qualities and characteristics that have benefited them in raising funds and completing transactions more successfully than their competition? JWV: Regardless of their size, those companies that

come to the market with opportunities where the value-added benefit to the company is quickly recognized along with attractive risk-adjusted economics readily apparent to the investor or lender are best positioned for a successful completion of a financing or acquisition. Oil and gas companies approaching the market having a less visible value proposition or economics have ultimately enjoyed a similar success because of a constructive relationship with its banker that enabled the company to convincingly validate its pursuit of that opportunity. RSC: Are there any recent deals in the marketplace that in their own right are either market leading in their innovation / deal-structuring / value creation? JWV: Offhand none of recent vintage come to mind

which I think isn‟t surprising given the generally conservative nature of the industry. On the other hand I think it‟s possible to consider deals like ExxonMobil‟s acquisition of XTO or Chesapeake‟s reordering of it asset portfolio as market leading – either because of their timing or for what they reveal about a company‟s perspective of future commodity prices, its financial health, its current competitive position or its regulatory outlook. RSC: What can small-cap oil and gas companies do better to ensure they can (i) raise capital with more favourable T&Cs, and (ii) complete A&D and M&A transactions to receive optimal deal value?

JWV: We frequently remind the small independents

we work with of the importance a rock-solid pro forma cash flow and production growth projections and evidence suggesting management‟s ability to effectively execute its business strategy has leading up to a successful capital raise or asset transaction. However, more recently and despite the apparent ample liquidity available to fund both development drilling and A&D transactions, we tell those clients that because of an apparent increase in deal flow –

that investors and lenders tell us they‟re now seeing –, solid pro forma projections and the promise of a well-executed strategy are necessary for a proposed deal to make it onto the short list. So within this context capital raises and asset transactions are more likely to involve term sheets or deal valuations that are “competitive”.

RSC: We’ve seen a record amount of A&D and M&A in the marketplace in the past 6-12 months. Do you still believe there is value to be acquired from the range of current assets/companies for sale? Or are we now getting to the point where assets and plays are not only as ‘cheap’ as they were but perhaps ‘more expensive’ than they should be? How inline or skewed are current asset/company valuations?

JWV: Certainly relevant questions but because of the high degree of correlation, directly and indirectly, between valuations of oil and gas transactions (or oil and gas company shares) and oil and gas prices, current and future, I think they need context to be best considered. For example taken from a broader perspective I am less certain of whether it‟s still possible in today‟s market to acquire value, than I might be about whether that likelihood exists for the company that has engaged us to assist with the A&D transaction it intends to pursue. From our initial due diligence and before bringing the deal to market we will have identified where our client sees value resulting from that transaction, and with the synergies or operating efficiencies anticipated as well as the commodity price environment assumed, how and how much value it expects to realize. RSC: If I may JW I’ll wrap up by asking your one-word opinion (bullish, bearish or uncertain) on the future of the following. Bullish, Bearish or Uncertain? JWV: Sure. But because Oberon Securities is a

regulated broker/dealer under provisions established by the Financial Industry Regulatory Authority, or FINRA, I must first preface my one-word responses by mentioning that they are my opinions only and not necessarily those of Oberon Securities. In addition none of my opinions should not be regarded as investment advice nor as a recommendation to buy or sell. Also I may or may

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not maintain a position in an investment related directly or indirectly to the general topics. RSC: Understood JW. First up, Barack Obama JWV: Uncertain

RSC: The US Dollar JWV: Bearish

RSC: Oil Shale JWV: Bullish

RSC: Domestic Natural Gas Plays JWV: Bullish

RSC: Small-cap Domestic Focussed Independents JWV: Bullish

RSC: Small-cap International Focussed Independents JWV: Bullish

RSC: Large-cap Domestic Focussed Independents JWV: Bullish

RSC: Large-cap International Focussed Independents JWV: Bullish

RSC: Canadian Oilsands JWV: Uncertain

RSC: JW, thanks very much for your time and your sharing your thoughts.

About JW Vitalone: Prior to joining Oberon Securities, JW spent nearly 15 years as an Energy sector equity research analyst with Wells Fargo Bank, Wachovia Corporation and Palladian Research covering Oil and Natural Gas Exploration & Production, Oilfield Services & Equipment, and Power Generation companies. JW‟s extensive research experience includes macro analysis of oil and gas markets, fundamental equity analysis and institutional buy-side marketing. Soon after earning a law degree, JW interned with the European Economic Commission as a Charles A. Dana Fellow in International and Comparative Law, where he worked on developing alternative approaches to financing lesser developed countries.

About Oberon Securities: Oberon Securities a New York based financial advisor addressing the financial needs of small and midsize companies across a broad range of industries. Our company was founded by senior professionals who have extensive experience in corporate finance, venture capital, research and operations. Oberon provides creative financial solutions to innovative companies that are seeking a significant market presence in their respective industries. Oberon's professionals have an average of more than 10 years on Wall Street; that combined experience and our market focus allow us to bring a level of service and expertise normally available only to large companies. For more information please visit: www.oberonsecurities.com

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