Domestic Oil and Gas Industry Trends

Investment Banking Experts for the Energy and Industrial Sector

Securities offered through PetroGrowth Energy Advisors, LLC, member FINRA/SIPC.

“Let’s Do A Deal”(Domestic Oil & Gas M/A/D Trends)

Boutique Energy & Industrial Investment Bank for the Middle Market

2

Wilcox | Swartzwelder & Co. Overview

Knack for understanding our client’s situation, positioning the company to unlock value, creating a highly credible and compelling “story”, selling it to the right investors / buyers and negotiating a favorable outcome

We Help ClientsCreate Value

Bring Wall Street Expertise to Main Street

Industry and Transaction Experts

Principals’ Successful Track Record

Senior level commitment; “boutique” service; high quality advice and deal execution

Combine Wall Street background and training, Ivy League education, industry knowledge, middle market investment banking experience and hard work to get deals done

Deal size generally up to $150 million

Industry specialization offers advantages to clients (knowledge, research and relationships)

Access to and ongoing communication with industry buyers/investors/capital sources

Rigorous, proven transaction process that yields superior results

Broad experience working with many complex deal types and structures in good and difficult markets

Principals bring almost 40 years of experience, more than 100 closed transactions with value in excess of $3.8 billion

Team includes five others providing analytic and back-office support

Leading boutique investment bank providing financial advisory solutions exclusively to mid-market companies in the Energy sector.


Advisory Services

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Mergers & Acquisitions / Company Sales /

Divestitures

Oil & Gas Property Sales & Divestitures

Institutional Capital Raising / Private

Placements

Financial AdvisoryRefinancing /

Recapitalization / Buyout

Merchant Banking / Private Equity

Helping clients define objectives, evaluate options and work side-by-side as advisor navigating through the maze of transactional complexities – from start to finish.


Energy Industry Specialization Benefits Clients

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Specialization offers numerous advantages to clients – research, industry intelligence, capital markets knowledge, valuations, trends, investor and buyer relationships.

Oilfield Services & Equipment

Upstream Oil & Gas (E&P)

Midstream Pipelines, Gathering, Storage & Blending

Downstream Services & Equipment

Environmental

Building and Construction

Electrical & Power

Engineering and Infrastructure

Industrial Distribution

Industrial Technology

Process/Flow Controls

Specialty Chemicals

Water / Wastewater

Energy Industrial

• Navigated through multiple cycles, completing transactions in periods of positive momentum as well as extremely difficult circumstances


Extensive Experience With Strategic Buyers

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Extensive experience marketing to and soliciting/negotiating with strategic players.

Energy Services Exploration & Production Industrial

Showed deals to over 155 unique energy services and equipment strategic buyers in 2012; have shown deals to over 500 unique strategic buyers of energy and industrial companies.

Ongoing communications with various strategics and track and monitor those groups which have completed M&As and submitted term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and valuation metrics.


Large Network of Institutional Capital Relationships

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Strong relationships with a large network of active institutional capital providers and investors focused on segments of the energy and industrial sector.

Showed deals to over 195 private equity groups in 2012; have shown deals to over 500 institutional private equity groups, senior and junior lenders, insurance companies, hedge funds and family offices focused on the middle market.

Maintain ongoing dialog with capital sources; provides real-time market feedback and accurate valuation guidance.

Track and monitor in our proprietary database those groups which have completed M&As in our target sector and submitted term sheets, bids, letters of intent and legal agreements for our deals; including deal terms, structures and valuation metrics.


Experience; Track Record - Example Transactions

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Experience spans over 100 transactions with aggregate value in excess of $3.8 billion.

$20 Million Revolving Credit$45 Million Term Loan

$25 Million Second Lien Loan

Management Buyout of Certain Assets from

Nighthawk Oilfield Services

Recapitalization with Ancor Capital Partners

Formed NewCo to Acquire Certain Assets from Texas Maximum Production, L.P.

Company Sale to MRC Global (McJunkin Red Man

Corporation)

Financial Advisory to Evaluate Strategic AlternativesSenior Debt Financing

Two State Oilfield Inc.

Production Specialty Services

Senior Credit Facility

Company Sale to Basic Energy Services

Recapitalization with Silver Peak Partners and

Saybrook

Management Buyout and Recapitalization

Company Sale to Frac Tank Rentals, LLC,

Portfolio company of Lone Star Investment Advisors

Strategic M&A Buyside Advisory

Acquisition of Genesis Gas Gathering Assets Private Placement

What Does the Future Hold for Domestic Oil & Gas M/A/D Activity?


Difficulty of Predicting the Future

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Difficulty of Predicting the Future (Oilfield Services Index – OSX)

10

Recession begins (April 2008)

Recession begins (April 2008)

Oil price reaches

$141.47/Bbl(June 27, 2008)

Oil price drops to $33.20/Bbl

(January 16, 2009)Recession ends

(June 2009)

European debt crisis

Governmentshutdown


How Good is Your Crystal Ball?

11

“How frustrating. The crystal ball is down again”Source: New Yorker – August 12, 1991


Key Exploration & Production Themes & Trends

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Historical Transaction Activity to Provide a Glimpse of the Future

Commodity Price Expectations Supportive for Oil/Liquids

Land Grab is Over; Move Toward Full-Scale Development & Optimization

Who is Buying O&G Deals?

Where Are the O&G “Hot Spots”?

Public Markets Value O&G Assets Much Higher than Private Market Valuations

What Makes a “Good” O&G Property Sale?


2013 M&A Volume Down

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2007 2008 2009 2010 2011 2012 2013 YTD$0

$50

$100

$150

$200

$250

$300

$350

$0

$20

$40

$60

$80

$100

$120 Energy Transactions by Year ($ billions)

Asset Volume Corporate Volume JV Volume WTI YE Price


Conventional Oil Valuations Have Been Steady & High

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1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000Production Metrics vs. WTI Price

Production Metrics ($/Boepd) WTI ($/Bbl)

$145.18/Bbl

$33.87/Bbl

$113.93/Bbl

$108.54/Bbl


Conventional Gas Valuations Have Started to Increase

15

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000Production Metrics vs. Henry Hub Spot Price

Production Metrics ($/Mcfepd) Henry Hob Spot Price ($/MMBtu)

$13.58/MMBtu

$2.51/MMBtu$1.91/MMBtu

$3.67/MMBtu


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Oil & Natural Gas Price Expectations – Forward Curve

Capital Expenditures – U.S.2012 - $137 billion 2013 - $143 billion2014 - $155 billion

2014 Budgets Based on Avg. $89 WTI

Increase spending: WTI > $107 Decrease spending: WTI < $74

2014 Budgets Based on Avg. $3.66 HH

Increase spending: HH > $4.57 Decrease spending: HH < $3.16

Feb-14 May-15 Aug-16 Nov-17 Feb-19$50

$55

$60

$65

$70

$75

$80

$85

$90

$95

$100

$3.60

$3.80

$4.00

$4.20

$4.40

$4.60

$4.80 5-Year Oil & Gas Forward Curves

WTI-Cushing Oil Henry Hub Natural Gas

Source: CME Group Source: Barclay’s Research 2014 Global E&P Spending Outlook


Not All Basins Are Created Equal - Oil

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$34$42 $43

$47 $47 $50 $50 $52 $52 $53 $53 $56 $59 $61 $61 $61$68 $69 $72

$81

$91Current WTI Price: $94.43

Oil Price Required for 10% Single-well IRR

Source: HPDI, industry research, TPH assumptions


Not All Basins Are Created Equal – Gas

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Gas Price Required for 10% Single-well IRR

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$2.05 $2.33

$2.60 $3.08

$3.15 $3.65

$3.75 $3.76

$3.89 $3.94

$4.15 $4.24

$4.54 $5.24

$5.35 $5.37

$5.70 $5.72

$6.00 Current HH Price: $4.52

Source: HPDI, industry research, TPH assumptions


Land Grab Over; Focused on Development & Proved Reserves

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Pre 2007 “Conventional Era”

2007 - 2012“UCRP Land Grab”

2012… “UCRP Execution Phase”

Holding Period

Exit Options

2 – 4 years 1 – 3 years 3 – 5 years

Plentiful Greater fool theoryMultiple years of inventory;

plenty of acres

Improve existing production

Cut costs Development plan

Limit drilling to exploratory wells

Hope to find “gold”

Optimize drilling & completion process

Cut costs Development

plan/manufacturing

Sell to public companies in need of drilling inventory

Less need to fully delineate

Significant interest while the music was playing (“flipping”)

Focus on high-grade inventory; eliminate non-core properties

Must spend meaningful capital to increase “producing value”


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Move Toward Efficiencies & Optimization

0

200

400

600

800

1,000

1,200

1,400

1,600 U.S. Horizontal vs. Vertical

Rigs

Horizontal Vertical

Frac Stages Over Time

4 Stages, 500 Meters

16 Stages, 1,600 Meters

40 Stages, 3,000 Meters


Who is Buying Oil & Gas Deals?

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International

International JV

Non-Traditional

Majors

MLPs/Trusts

Large Caps

Private Equity

Small Caps

$0.0 $5.0 $10.0 $15.0

$2.5

$4.5

$5.0

$5.1

$8.5

$10.8

$12.9

$13.2

U.S. Onshore demand over past 18 months.

Small caps fueled by robust high yield market

Private equity teams searching for conventional opportunities

Large caps primarily interested in “core” oil resource play positions

MLPs searching for long-life, low-decline assets


Private Equity and MLP Appetite

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Private Equity MLP$0

$10

$20

$30

$40

$50

$60

$70 $62

$34

EV of E&P Focused Capital 50 – 60 teams backed by PEGs

hunting for platforms and ‘bolt-on’ acquisitions

Private Equity

Growth through acquisition

Operational platform capabilities to support rapid expansion

Distribution pressure

MLP’s


Production Valuation Time Horizon

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0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 1050

100

200

300

400

500

600

$20,000 / Boepd

$50,000 / Boepd

$80,000 / Boepd $150,000 / Boepd$100,000 / Boepd

Net

Pro

ducti

on (B

oepd

)

Months

Public

High-risk, high-rate

Private Equity

Flattening decline

MLP

Low-decline, stable cash flow


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Upstream M&A Increasingly Concentrated in “Hot Spots”

Permian, 21

Bakken; 17

Eagle Ford; 24

Barnett; 6

Woodford; 7

Utica; 10

Hay-nesville; 2

Multi; 3Niobara; 2

Granite Wash; 7

Marcellus; 6MS Lime; 4 Gulf Coast, 2

2012 – 2013 Resource Deals Focus Areas Equity markets rewarding

basin consolidators

By far, the majority of buyers already have established positions and are acquiring to consolidate core position

Source: IHS Herold


Example: Permian Basin – Highly Coveted

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East Texas Basin

Delaware Basin

Bakken

Prudhoe Bay

Eagle Ford

Spraberry/Wolfcamp

0 10 20 30 40 50 60

Field/Reserve Size (Billion Boe)

Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-170

400

800

1,200

1,600

2,000Permian Basin Production (MBoe/d)

Oil/liquids

Stacked pays

Mature infrastructure

Reserve potential

Expected production increase

Compelling rates of return relative to other basins

Characteristics of Permian Basin

Source: Bentek & Energy Information Administration


Valuations Reflect the “Permian Premium”

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Permian Index: Diamondback Energy (FANG), Pioneer Natural Resources (PXD), Energen Group (EGN), Laredo Petroleum Holdings (LPI), Cimarex Energy (XEC), Concho Resources (CXO), Callon Petroleum Company (CPE) and Approach Resources, Inc. (AREX)

DJSOEP Index: Dow Jones U.S. Select Oil Exploration and Production (DJSOEP)

Oct-12 Jan-13 May-13 Aug-13 Nov-13-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%Permian Index vs. DJSOEP Index

Permian Index DJSOEP Index


Valuations Reflect “Permian Premium”

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RRC

PXD

ATH

L

EQT

LPI

COG

CXO

FAN

G

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CLR

REXX XE

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CHK

NFX HES

WLL

DVN APA SM

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x10.6x

10.2x9.7x

9.2x8.6x 8.5x

7.6x7.2x

6.8x 6.6x 6.6x6.1x 6.0x 5.7x

4.7x 4.7x 4.4x 4.4x 4.4x 4.3x

Valuation for Public Market Operators

EV /

201

4E E

BITD

A Focused (8.5x)

Multi-Basin (4.7x)

Company


Large Arbitrage Between Public and Private Market

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Permian ($/boe) Appalachia ($k/acre) Mid-Continent ($/Boe) Bakken ($/acre)$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0Public Co. Trading Multiples vs. Median Transaction Mul-

tiples

Public Market Valuations A&D Market ValuationsSource: FactSet and Herold. Permian includes ATHL, AREX, FANG, LPI, CXO and PXD; Appalachia includes COG, AR, EQT, GPOR, REXX, RRC and SWN; Eagle Ford includes ROSE and SN; Bakken includes CLR, KOG, OAS, TPLM, and WWLL. Appalachia includes Marcellus and Utica deals while Mid-Continent includes Granite Wash, Mississippi Lime and Woodford shales as well as Mid-Continent conventional deals.


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Valuation for Coveted Unconventional Resource Plays

Bakken$15,000 - $25,000 / Acre (Core)$7,000 - $15,000 / Acre (Tier 1)$4,000 - $7,000 / Acre (Tier 2)

Niobara $5,000 - $10,000 / Acre (Core)$3,000 - $5,000 / Acre (Tier 1)

Permian – Delaware Basin$15,000 - $20,000 / Acre (Core)$10,000 - $15,000 / Acre (Tier 1)$5,000 - $10,000 / Acre (Tier 2)

Permian – Midland Basin$15,000 - $20,000 / Acre (Core)$10,000 - $15,000 / Acre (Tier 1)$5,000 - $10,000 / Acre (Tier 2)

Eagle Ford$25,000 - $35,000 / Acre (Core)$15,000 - $25,000 / Acre (Tier 1)$7,500 - $15,000 / Acre (Tier 2)

Anadarko$10,000 - $15,000 / Acre (Core)$6,000 - $10,000 / Acre (Tier 1)

Utica$10,000 - $14,000 / Acre (Core)$6,000 - $10,000 / Acre (Tier 1)$4,000 - $6,000 / Acre (Tier 2)


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Regional Conventional Oil & Natural Gas Valuations

Rockies$90,000 - $120,000 / Boepd5.0x – 7.0x FTM Cash Flow

California$100,000 - $125,000 / Boepd

6.0x – 7.0x FTM Cash Flow

Permian$125,000 - $150,000 / Boepd


East Texas$90,000 - $120,000 / Boepd5.0x – 7.0x FTM Cash Flow

Mid-Continent$100,000 - $125,000 / Boepd


Rockies$5,000 - $7,000 / Mcfepd


Barnett$5,000 - $7,000 / Mcfepd


Gulf Coast$4,000 - $6,000 / Mcfepd


Ark-La-Tex$6,000 - $8,000 / Mcfepd


Mid-Continent$6,000 - $8,000 / Mcfepd


Appalachia$5,000 - $7,000 / Mcfepd



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Assets > 30% Proved Developed Producing (PDP)

Production > 150 to 200 BPD

Predominantly oil / liquids

Not excessive well count

No well concentration > 25% of total production/reserve value

Repeatable, predictable results

Long life > 10 Years

Limited lease expiries near term

3rd party reserve report

Maps

Financials

Clean property title

What Makes for a “Good” Oil & Gas Property Sale?

Characteristics Informational Needs

Minerals

Working interests (operating & non-operating)

Royalties

Leases (more difficult)

Assets to Monetize

Case Study


33

Puts pressure on buyers to offer their best deal (eliminates “tire-kickers”)

Creates alternatives; allows seller to simultaneously evaluate multiple offers and determine “best” deal

Allows seller to pick a buyer that meets his goals

Seller maintains negotiating leverage and a position of strength

Broad “market test” ensures achieving the highest market clearing price

How Can a Seller Achieve Maximum Price/”Best” Deal?

Create a competitive market among multiple, qualified buyers.


Building A Competitive Market Case Study

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A B C D E F G H I J K $-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

$90.0

$82.5 $80.0 $80.0 $79.7 $75.0

$65.0 $65.0 $61.1 $60.0

$50.0

Since “beauty is in eye of beholder”; it pays to broadly test the market $40 million difference between initial high and low bids

Initial Indications of Interest ($mm)

Financial SponsorStrategic Buyer


Thank You!

35

102 Decker Court, Suite 204Irving, Texas 75062

972-831-1300

Jason Wilcox: [email protected] Swartzwelder: [email protected]

Website: ws-ibank.com

Domestic Oil and Gas Industry Trends

Economy & Finance