1800 Avenue of the Stars, Second Floor • Los Angeles, California 90067 • Tel 800.231.7414

1100 Louisiana Street, Suite 4550 • Houston, Texas 77002 • Tel 713.655.7351

www.kayneenergy.com

Kayne Anderson Energy Funds

January 2006

Independent Petroleum Association of America 2006 Private Capital Conference

2

Firm Background

With offices in Los Angeles and Houston, Kayne Anderson Capital Advisors employs over 40 people. Distinct teams of investment professionals are dedicated to the various investment strategies managed by the firm.

Approximately $4.4 billion (80%+) dedicated to the energy industry!

Kayne Anderson Capital Advisors, LP

Energy Group(Structured Energy

Investments)

$900 Million raised

45+ transactions with 25+ oil and gas

companies since 1992

8 investment professionals

(6 in Houston, 2 in Los Angeles)

Closed End Fund Group

(NYSE: KYN and KYE)

$2.5 Billion in Assets

Hedge Fund Group

(Marketable Securities)

$1.5 Billion in Assets

Private Equity Group

(Non-Control Investments)

$360 Million raised

ENERGY

Energy Investments

(Public Companies)

$1.0 Billion in Assets

NON-ENERGY

3

Life Cycle of Small Oil & Gas Companies

A B C D

Life of a Company

Val

uat

ion

Risk Profile: High Medium Low

Risk Type: Engineering Drilling Operational Geologic Operational Commodity Price

Fund Type: Private Private Mezzanine Venture Tranche B

Kayne Anderson: A-B & B-C Risk

4

Private Equity Energy Capital Markets

Significant amount of new capital has been committed to seasoned and new funds

Approximately $8.5 billion has been raised in the last 2 years by energy private equity funds (a)

– Kayne Anderson Energy Fund III closed in November 2004 with total commitments of $550 million (to date, 50% committed to 7 portfolio companies)

Also, traditional energy private equity players have been raising complementary, non-equity funds

– Working interest funds, mezzanine funds, royalty funds, etc.

Larger funds necessitate larger transactions and/or more portfolio companies

During the last 2 years, private equity-backed companies have accounted for approximately 15% and 30% of E&P buyside and sellside transactions, respectively (b)

(a) Source: COSCO Capital Management LLC.

(b) Source: Richardson Barr & Co. Percentage by deal count for transactions between $25 million and $1 billion.

5

Private Equity Energy Capital Markets

Source: Richardson Barr & Co.

$8 $8 $10 $10 $10 $10$14

$24

$0

$10

$20

$30

$40

$50

$60

1998 1999 2000 2001 2002 2003 2004 2005

($ B

illio

n)

Asset Corporate$156

$41

$58

$43

$5

$63

% Private Equity 5% 32%

% PDP 70% 40%

M&A Boom

70/30 Blended Spot Price

$13

Private equity-backed companies have become increasingly prevalent in the M&A marketplace and are one of the main reasons PDP percentages (as a % of total reserves in sellside transactions) have decreased dramatically

Have a “build to sell” mentality recognizing that public E&P companies need to acquire upside and will pay for it

6

Hot Domestic Plays

Sought after properties are more “repeatability” oriented, but cost of entry is at an all-time high and services can be a problem

Tight sands

Shales

Coal bed methane

Horizontal drilling

Bakken Shale

Piceance Uinta

Cretaceous Sands

Barnett Shale

E. Texas / N. Louisiana

Arkoma Caney Shale

Appalachia CBM

7

Use of Leverage

Commercial banks have been aggressive in the E&P space

Competitive atmosphere for commercial banks to keep their loan dollars “at work”

– Borrowing base calculations based on higher price decks with more value given to non-PDP reserves

Bank price decks still conservative compared to NYMEX strip or equity research price estimates

– Long-term price decks of approximately $35.00/bbl oil and $5.00/Mcf gas

– Hedging PDP production helps to “bridge the gap”

Tranche B loans being used more frequently as a source of capital

Private equity firms are maximizing usage of 6%-7% bank debt to achieve target equity returns

8

Use of Hedging

Private equity firms are maximizing usage of long-term hedges for PDP production

Increases bank borrowing base, thereby lowering overall cost of capital

“Lock in” current commodity prices

– If prices go higher, hedges are “underwater” but generally nice problem to have since unhedged reserve base is more valuable

Source: Petrie Parkman & Co.

9

Drilling Economics

Capital is being used to accelerate drilling and rates of production

Services may be a problem – rigs, fracs, etc.

E&P companies are committing to long term contracts with service companies

“Rule of thumb” metrics don’t make sense any more

Full cycle margins at all-time high, and market valuations reflect this

Adjusted EV/ Adjusted EV/TP Reserves Production

($/Mcfe) ($/Mcfed)

Large Caps 3.01 13,743Mid Caps 3.18 12,441Small Caps 4.69 17,659

Current Trading Comparables

Sticker Shock?

Source: Scotia Capital.

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E&P Full Cycle Margins

0.82

0.220.21

0.56

1.15

0.240.18

0.57

1.32

0.30

0.23

0.57

0.94

0.40

0.22

0.64

1.09

0.35

0.21

0.76

1.57

0.290.20

0.82

1.16

0.32

0.23

0.81

1.63

0.31

0.26

0.97

2.02

0.30

0.26

1.12

2.25

0.29

0.32

1.39

2.50

0.27

0.32

1.51

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00U

nit

Co

sts

($

/Mc

fe)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E

FD&A Int + Pfd G&A LOE + Taxes

Source: JPMorgan Chase Global Equity Research.

($/Mcfe)1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E 2006E

Full Cycle Margins:

Actual Revenue (1) $3.03 $2.77 $2.18 $2.55 $4.53 $4.07 $3.65 $5.41 $6.21 $8.99 $10.02Full Cycle Cost 1.81 2.14 2.42 2.20 2.41 2.88 2.52 3.17 3.70 4.25 4.60Full Cycle Margin $1.22 $0.63 -$0.24 $0.35 $2.12 $1.19 $1.13 $2.24 $2.51 $4.74 $5.42

(1) Weighting: 70% gas, 30% oil. 2006E assumes 12 month NYMEX strip as of 1/9/06.

11

Declining Production

Despite record investment levels and rig counts, North American gas production has been declining year-over-year (even adjusting for 2005 hurricane effects)

Average gas well decline rate has increased from 16% per year in 1992 to approximately 30% per year in 2005 (a)

Chart Source: JPMorgan Chase Global Equity Research.

(a) Source: EOG Resources.

12

Market Trends in Private Equity Deals

Funds are bigger, able to write much larger checks and need to deploy capital

“Blank check” investing using control of capital budgets to allocate capital

Offering management teams better economics after return thresholds

Fewer “B-to-C” investment opportunities since many companies are being sold and management teams are starting over from scratch

More “A-to-B” investment opportunities

Less management equity in deals

Shorter hold periods since acquirors willing to pay for upside

Management teams doing second, third and fourth deals with equity funds

13

Downside Protection

Most funds can sustain a substantial decline in prices without losing capital

Hedging PDP production

Use of bank debt to fund drilling and acquisitions

Remain conservative in commodity price assumptions

– Kayne Anderson uses a discount to NYMEX 5-Year strip for unhedged volumes

– Pressure to increase these price assumptions

Exit timing flexibility to ride out price cycles

Nonetheless, ROI/IRR could fall below target returns

14

Pros & Cons of Private Equity

Pros Cons Knowledgeable partner

Structuring flexibility

Allows all parties to find appropriate risk/reward trade-offs

Fills void of debt capital markets and public equity markets

Patient, growth-oriented capital

Consistently available

Alignment of interests

No cash flow sweep

Management gets promote on $ invested

Management has virtually unlimited checkbook for “equity return” projects

Control

Board control

Budget approval rights

Subsequent financings

Forced sale provision

Expensive capital

Dilutive to shareholders

Appendix: Kayne Anderson Energy Funds

16

2005 Kayne Anderson Update

Kayne Anderson closed Kayne Anderson Energy Fund III (“EF 3”) in November 2004 with total commitments of $550 million

During 2005, Kayne Anderson monetized interests in 7 companies

Panther Energy (EF 2) – private sale of Kayne Anderson’s interests (February 2005)

Blue Mountain Energy (EF 1) – private sale of Kayne Anderson’s interests (April 2005)

Profico Energy (EF 1) – private sale of Kayne Anderson’s interests (May – August 2005)

Medicine Bow (EF 2) – company sale to El Paso for $814 million (August 2005)

Lyco Energy (EF 2) – company sale to Enerplus for $421 million (August 2005)

The Exploration Company (EF 2) – partial asset sale to EnCana for $80 million (September 2005)

Crusader Energy (EF 2) – company sale to Encore for $108 million (October 2005)

During 2005, Kayne Anderson made commitments to 8 companies totaling $326 million

$48 million committed to Crusader Energy II (EF 2)

$278 million of EF 3 has been committed (see next page)

Currently in discussions with 3 other companies for total commitments of approximately $130 million

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EF 3 Portfolio Companies

CompanyKayne Anderson

CommitmentPrimary Area of

FocusPresident/CEO

Blacksand Energy $40 MM Los Angeles Basin Tim Collins

Caddo Resources $50 MMEast Texas / North

LouisianaRex Corey, Jr.

Cavallo Energy $38 MM Texas Panhandle George SanFilippo

CORE Energy $20 MM Michigan Bob Mannes

Crusader Energy III $50 MM Oklahoma Dave Le Norman

Matris Exploration $30 MMSan Joaquin &

Sacramento BasinsRich Langdon

Pedernales Production

$50 MM Gulf CoastJoe Bailey / George

Kane

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Current & Past Portfolio Companies

M TRISM TRIS

CADDO RESOURCES LP

CAVALLO ENERGY LP

PEDERNALES PRODUCTION LP

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Los Angeles Office

Richard "Ric" Kayne – CEO of Kayne Anderson Capital Advisors and Kayne Anderson Rudnick Investment Management

He began his career in the mid-1960s as an analyst with Loeb, Rhodes & Co. in New York. Prior to forming Kayne Anderson in 1984, Mr. Kayne was a principal of Cantor Fitzgerald & Co., Inc., where he managed private accounts, a hedge fund and a portion of firm capital. Mr. Kayne is a trustee of and the former Chairman of the Investment Committee of the University of California at Los Angeles (UCLA) Foundation and is a trustee and Co-Chairman of the Investment Committee of the Jewish Community Foundation of Los Angeles. He earned a BS in Statistics from Stanford University in 1966 and an MBA from UCLA in 1968.

Robert "Bob" Sinnott – President, Chief Investment Officer and Senior Managing Director of Energy Investments

Prior to joining Kayne Anderson in 1992, Mr. Sinnott was Vice President and senior securities officer of Citibank’s Investment Banking Division from 1986 to 1992, concentrating in high-yield corporate buyouts and restructuring opportunities. From 1981 to 1986, he served as Director of Corporate Finance for United Energy Resources. Mr. Sinnott began his career in the financial industry in 1976 as a Vice President and debt analyst for Bank of America. Mr. Sinnott graduated from the University of Virginia in 1971 with a BA in Economics. In 1976, he received his MBA in Finance from the Harvard Business School.

Houston Office

Daniel "Danny" Weingeist – Senior Managing Director of Energy Investments

Prior to joining Kayne Anderson in 1999, Mr. Weingeist was a Managing Director and principal of Torch Energy Advisors, a Houston-based company that provides capital and specialized outsourcing services to the industry. Prior to that, he served as Vice President with EnCap Investments and as a Reservoir Engineer at Exxon Company U.S.A. Mr. Weingeist is a 1985 graduate of the University of Texas with a BS in Petroleum Engineering and an MBA in 1989.

Charles "Chuck" Yates – Managing Director of Energy Investments

Prior to joining Kayne Anderson in 2001, Mr. Yates was Senior Vice President and head of the Power Technology Group at Stephens Inc., an integrated merchant and investment bank. A member of Phi Beta Kappa, Mr. Yates received his BA in 1991 and his MBA in 1994 from Rice University.

Michael "Mike" Heinz, Jr. – Managing Director of Energy Investments

Prior to joining Kayne Anderson in 2002, Mr. Heinz was a Senior Vice-President of Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Heinz began his career in the oil and gas industry in 1984 as a reservoir and operations engineer for Exxon Company U.S.A. Mr. Heinz graduated from the University of Tulsa in 1984 with a BS in Petroleum Engineering.

Gifford “Giff" Wilkerson – Vice President of Energy Investments

Prior to joining Kayne Anderson in 2004, Mr. Wilkerson was a reservoir engineer with Netherland, Sewell and Associates, Inc., a Texas-based oil and gas consulting firm that provides a complete range of professional reservoir engineering, geophysical and geological services to the worldwide petroleum industry. Mr. Wilkerson began his career in the oil and gas industry in 1991 with Exxon Company, U.S.A. where he held various reservoir, operations, and supervisory assignments. Mr. Wilkerson received his BS degree in Civil Engineering, cum laude, from Louisiana State University in 1990 and his MBA from the University of New Orleans in 1997.

James Broach – Vice President of Energy Investments

Prior to joining Kayne Anderson in 2005, Mr. Broach was an Associate in the energy investment banking group of Credit Suisse First Boston where he worked on a broad array of capital markets and M&A transactions. Prior to attending graduate business school, he was an Analyst in the energy investment banking group of Stephens Inc., an integrated merchant and investment bank. Mr. Broach earned his BA in Economics from Trinity University in 1998 and his MBA from the University of Texas at Austin in 2003.

Investment Professionals

20

What Sets Kayne Anderson Apart?

Technical expertise

We have 3 engineers with combined 50 years of industry and third party consulting experience in every onshore domestic basin

We can evaluate complicated situations quickly (without requiring outside engineering services or a reserve report)

We can help portfolio companies evaluate deals (just ask our CEOs!)

Will hold majority or minority stakes

Will invest in both private and public companies

Will invest in “A-to-B” and “B-to-C” risk companies

Increased access to capital markets and deal flow

We have been investing in energy since 1992

45+ transactions with 25+ oil and gas companies

Unique structuring capabilities to help all parties find appropriate risk/reward trade-offs