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Drilling Capital for the Small ProducerWells Fargo Energy Capital, Inc.Michael NepveuxManaging Director
Williston Basin Petroleum ConferenceBismarck, North DakotaMay 22, 2012
Wells Fargo Overview
One in three households in America does business with Wells Fargo. Wells Fargo has $1.3 trillion in assets and more than 275,000 team members across 80+ business lines.
Assets
$1.3 trillion
Rank by assets
4th
Among U.S. Peers
Rank by value of stock
1st Among U.S. Peers
Rank by value of stock
3rdAmong global financial institutions
Market value of stock
$177.6 billion
Team members
270,000
Customers
More than 70 million
Fortune 500 rank
23rd Among all companies, by revenue
Total stores
More than 10,000North America
ATMs
More than 12,000#3 branded bank ATM owner
Key facts1
1 Company data as of March 31, 2012
Our vision
We want to satisfy all our customers’ financial needs, help them succeed
financially, be the premier provider of financial services in every one of our
markets, and be known as one of America’s great companies.
Wells Fargo serves consumers and businesses in more communities than any other U.S. Bank
Wells Fargo strength
Numbers in billions
Market capitalization as of 3/31/12
Source: Capital IQ
JP Morgan HSBC Citibank Bank of America
RBC Capital Markets
Goldman Sachs
US Bank UBS Barclays Deutsche Bank
Morgan Stanley
Credit Suisse
Wells Fargo Energy Group Overview
Wells Fargo Energy Group Commitments
*estimated data
$30B
Wells Fargo Energy Group Comprehensive Coverage Model
Dedicated relationship client coverage team with offices located geographically near clients
7 offices and 185+ team members in North America, including 19 in-house engineering professionals
$30B of credit committed to Clients
Relationship Manager is the primary contact into all the various solutions of the bank including:
– Credit and capital solutions
– Treasury management
– Asset management
– Risk management
– Receivables Management
– Corporate Services
– Second Lien, Mezzanine and Equity - Wells Fargo Energy Capital
Deposit products offered by Wells Fargo Bank, N.A. Member FDIC.
8
Wells Fargo has the #1 Energy Non-Investment Grade Debt Capital Markets Platform
Source: Loan Pricing Corporation, S&P/LCD, Dealogic and Wells Fargo Securities
Note: I ncludes Lead Arranged Syndicated Loans and Bookrun High Yield deals. Loan data through 12/31/11 and High Yield data through 04/11/12
$58
$54
$42
$16 $15 $14
$11
$8$7 $7
$6$3
$0
$10
$20
$30
$40
$50
$60
Wells Fargo Bank of America RBS Citi Morgan Stanley Deutsche Bank
($ in Billions)
Volume of Energy Transactions (2010 -2012 YTD)
JP Morgan Citi BankBank of America
RBC Goldman Sachs
UBSBarclays Deutsche Bank
Morgan Stanley
Credit Suisse
RBS
Wells Fargo has the #1 Energy Non-Investment Grade Debt Capital Markets Platform
($ in Millions)
Rank Institution No. of Deals Volume
1 Wells Fargo 116 $26,453.62 Bank of America 76 16,722.43 J P Morgan 75 27,110.04 BNP Paribas 63 21,396.95 RBS 23 4,174.66 BMO 18 3,238.37 Citi 15 2,865.88 RBC 14 5,340.09 Deutsche Bank 11 1,177.2
10 US Bancorp 10 839.5
Source: Loan Pricing Corporation and Wells Fargo Securities
2011 Loan Syndications –
Energy Lead Arranger
Full Credit to Bookrunners (by Deals)
Wells Fargo has the #1 Energy Non-Investment Grade Debt Capital Markets Platform
2011 High Yield Energy League Table
Book-Managed Deals (by Deals)
($ in Millions)
Rank Underwriter No. of Deals Volume
1 Wells Fargo 39 $4,994.02 Bank of America 38 4,990.03 J P Morgan 38 4,361.54 Credit Suisse 25 3,453.25 Barclays 19 2,797.96 RBC 19 2,120.97 RBS 19 2,369.48 BNP Paribas 18 1,736.49 Morgan Stanley 15 3,639.6
10 Citi 14 2,643.6
Source: Wells Fargo Securities and Dealogic
Wells Fargo has the #1 Energy Non-Investment Grade Debt Capital Markets Platform
2012 YTD High Yield Energy League Table
Book-Managed Deals (by Deals)
($ in Millions)
Rank Underwriter No. of Deals Volume
1 Wells Fargo 22 $2,750.12 Credit Suisse 20 2,807.63 J P Morgan 17 2,409.64 Citi 17 2,376.75 Bank of America 13 1,902.96 Deutsche Bank 13 1,666.37 RBC 12 1,632.68 RBS 10 1,590.99 Barclays 10 1,242.6
10 BMO 8 943.8
Source: Wells Fargo Securities and Dealogic
Wells Fargo Energy Capital Overview
Overview of Wells Fargo Energy Capital
Established in 1996 as a non-bank subsidiary of Wells Fargo & Company
Headquartered in Houston, satellite offices in Denver, Dallas and Pittsburgh
– 7 Investment professionals, 13 total staff
Provides acquisition and development capital to upstream and midstream North American oil and gas companies
– Development Drilling (Mezzanine) Loans
– Direct Equity Investments
– Joint venture capital
– Second Lien Term Loans
– Equity Fund Investments
Roughly $1.2B of active debt and equity commitments
– $600MM of Debt / $600MM of Equity
Other products include bridge facilities, volumetric production payments (VPP’s), and private placements
Few E&P mezz specialists have survived
Wells Fargo
Aquila Macquarie NGPC
Beacon Mirant Denham CIT
Cambrian Koch WilliamsPetro-bridge
LehmanGuggen-
heim
Enron KCS StratumDeutsche
BankDuke D.E. Shaw
Silver-point
Carlyle
EIG (TCW) RIMCO Torch MGTenneco /
RangeGE Capital Cargill Shell
Goldman Sachs
Gasrock Chambers
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2011
Prepared for the 2011 IPAA Private Capital Conference by EIG (TCW) – This list is illustrative only and is not purported to be comprehensive or precise as to the dates shown.
Wells Fargo
Aquila Macquarie NGPC
Beacon Mirant Denham CIT
Cambrian Koch WilliamsPetro-bridge
LehmanGuggen-
heim
Enron KCS StratumDeutsche
BankDuke D.E. Shaw
Silver-point
Carlyle
EIG (TCW) RIMCO Torch MGTenneco /
RangeGE Capital Cargill Shell
Goldman Sachs
Gasrock Chambers
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2011
Prepared for the 2011 IPAA Private Capital Conference by EIG (TCW) – This list is illustrative only and is not purported to be comprehensive or precise as to the dates shown.
WFEC is one of a few long term players
State Rankings of Oil Producing States
1. Texas
2. North Dakota
3. Alaska
4. California
North Dakota
North Dakota
Where Do We Fit in the Development Cycle?
Production
Start-Up Development Acquisition Development
Development Loan, Equity
Senior Revolver
Subordinated Debt, Equity
Syndicating Senior
Revolver
Risk / Return Matrix
Equity
(Public & Private)
Mezzanine Debt
(Development Drilling Loans)
Targ
et
Rate
of
Retu
rn %
5
10
15
20
25
30
35+
0
Bank Loan(Senior Debt)
Risk
HighLow
Public Debt (High Yield)
Second Lien Debt
WFB
WFEC
Definition of Mezzanine Debt
Good solution for companies who:
– Need capital to acquire and/or develop reserves
– Require more capital than commercial banks will provide
– Don’t want to sell or bring in a partner
– Want to avoid ownership dilution inherent in raising equity capital
Mezzanine (mĕz‘ 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.
Features of Typical Mezzanine Drilling Projects Primarily PUD reserves, sometimes lower risk probable reserves – as may be the
case in current Bakken and Three Forks development drilling programs
Usually requires some PDP, although lower risk drilling may not
Reputable third party reserve report usually required to close, but not to start the process
Experienced operators only, or non-operating companies with real oil and gas experience
Typically the sponsor pays for leases and seismic; we pay for capital expenditures
Since take-out is frequently conforming reserve-based bank loans, must be very economic drilling programs
Mezzanine Development Drilling Loan – Typical Structure and Terms
Advancing line of credit; highly customizable; high level of lender involvement
Designed to fund 100% of capex per pre-approved development plan; loan is
funded as/when AFEs/JIBs presented to lender; may have some ability to
refinance debt or equity at closing
Recourse only to the oil and gas assets; no personal guarantees
Two year term: typically sufficient time to allow refinancing by conforming
reserve-based bank loan
Most cash flow swept monthly to repay first interest, then principal; allowances
made for G&A
Targeted all-in IRR of 15 – 25%, including coupon of Prime + 3% - 6% plus equity
kickers comprised primarily of APO NPI, possibly overrides or warrants
Some hedging may be required
Mezzanine Advantages vs. Conforming Reserve-based Bank Loans
Higher advance rates
Accelerate funding and development (Bakken translation: keep up with pad drilling and zipper fracs)
Ability to capitalize interest
Willingness to absorb significantly higher reserve risk (e.g., undeveloped reserves, well concentration, recently drilled wells)
Ability to customize for unusual situations
Greater flexibility to change /amend once the program is underway
Smaller equity contribution required
Allows substantially higher leverage versus both cash flow and equity
Mezzanine Advantages vs. Private Equity
Retain greater portion of the upside
Easier access to a lot of capital
Cheaper way to finance a lower-risk development drilling program
Maintain control of Board
Easier to exit on your chosen timing/terms
Thank youMichael Nepveux
Managing Director, Wells Fargo Energy Capital
303-863-5589