Acquisition and Sale of Oil

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Acquisition and Sale ofOil Gas
PropertiesHAPL Technical Workshop

• April 24, 2008Houston, Texas

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Topics

• The Clearinghouse
• U.S. MAD Overview
• Sell Side Discussion
• Buyer Process Guidelines

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Company Services
A D Marketing Services
Hybrid Live/Internet Auction Exclusively Online
Auctions Mid-Value Negotiated Transactions Negotia
ted Transactions
Software, Data Services
Excalibur Enterprise Upstream Tobin Qbyte Entillig
ent Petroleum Financial, Inc.
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The Perfect Venue for Every Property
Since 1993
Since 1999
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The Clearinghouse - Unique to the Industry

• Only marketing firm which offers multiple AD
  service lines
• Custom Negotiated Transactions, Mid-Value
  Negotiated Sales, Live and Internet Auctions
• 65 full-time staff in every discipline related to
  property sales and support
• Unmatched engineering/geological/land support
  staff
• Commitment to technical excellence and the
  credible, ethical presentation of reserve
  potential
• 12 evaluation engineers, 4 geologists, 6 techs
  all employees or full-time contract
• Eight full-time land professionals and techs
• Regional Marketing Team
• Business development representatives in Houston,
  Calgary, Dallas, Denver Oklahoma City
• 10 full-time employees devoted exclusively to
  business development and marketing
• Extensive Personal Contacts
• Companys senior executives and marketing
  personnel have more contacts at more levels than
  any other AD service provider in the industry
• Most significant property purchasers have bought
  and/or sold through The Clearinghouse
• First only company to provide hybrid auctions
• Simultaneous floor Internet bidding

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TOTAL SALES US AUCTION TRANSACTIONS
Fiscal Year Ending September 30
GROSS SALES M
1 lot 1,
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Average Hybrid Auction - US
Fiscal Year Ending September 30
SALE SIZE (M)
1 lot 1,
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• U.S. MAD Overview

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U.S. Upstream Activity
First Half
Source JS Herold
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Historical Transaction Values(Asset Deals Only)
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Product Prices vs. Acquisition Metrics(MCFE _at_
61)
Through July Asset Deals Only
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Valuation Methods

• Discounted Cash Flow - Risked
• Risked present value of reserves to be produced
• Generally, DCF is the most utilized and most
  accurate method of valuation
• /BOE or /MCFE Reserves in the Ground
• /BOEPD or /MCFED Price per Net Daily Barrel
• Cash Flow Multiples
• P/I Profit to Investment Ratio

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Valuation Metrics Present Value

• Discounted Cash Flow ()
• Value today (present value) of future cash flow
  assuming a specified return on investment
• Subjective calculation Based on estimate of
• future recoverable reserves, flow rates and
  future prices
• Proved undeveloped (PUD), probables and possible
  future reserves are risk adjusted
• Return hurdles are often different for different
  reserve categories
• Generally before Federal Income Taxes (BFIT)

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Valuation Metrics Reserves in the Ground

• Per Net BOE or MCFE (61)
• Price paid per net barrel of oil equivalent for
  reserves in the ground
• Subjective calculation Based on estimate of
  future recoverable reserves
• Net after royalty deduction
• Gas converted to oil equivalent on 61 ratio
• Important to distinguish between PDP v. Total
  Proved calculations
• Old rule of thumb 4-5 per BOE

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Valuation Metrics Net Producing Unit

• Per Net BOEPD or MCFED (101)
• Price paid per net daily producing barrel
• Pure calculation
• Gross daily production x NRI divided by price
  paid
• Gas/oil converted on either 101 or 61 ratio
• Old rule of thumb 10,000 / net daily barrel
  (WI)
• 30,000 / net daily barrel (RI)
• Today 45,000 / net daily barrel (WI)
• 90,000 / net daily barrel (RI)

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Example BOEPD calculation

• Assume a property in Permian Basin is sold for 4
  Million and is producing
• 100 barrels of oil per day
• 100 MCF per day (a.k.a. 100,000 cubic feet of
  gas)
• (1 M 000)
• Step 1 Convert gas to equivalent barrels of
  oil at 61 ratio
• Divide 100 by 6 16.66 boe
• .16 bo per 1,000 (M) of gas
• Step 2 Add converted gas to oil production
• 16.66 boe 100 bo 116.66 boe gross daily
  production
• Step 3 Multiply gross daily boe by NRI to
  calculate Net boepd
• 116.66 boe x 75 NRI 87.5 Net boepd
• Step 4 Divide sales price by Net boepd
• 4,000,000 Sale Price / 87.5 net boepd 45,714
  per net boepd

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Valuation Metrics Cash Flow

• Multiples of Cash Flow (months)
• Price paid divided by current cash flow
• Pure calculation Price divided by monthly cash
  flow amount
• Define cash flow
• Trailing average of last 6 months?
• Most recent month?
• Forecasted cash flow?
• Not the same as Payout - Does not account for
  production decline
• Old rule of thumb in Gulf Coast was 36 months for
  WI and 48 months for royalties/ORRI
• CF metrics have not changed much, but vary widely
  by region

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Industry Benchmarks

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Industry Benchmarks - Property Types

WI
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Valuing Upside - Types Associated Risking
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Other Risk Factors for Consideration

• Operations Control
• PDP/Upside Ratio (Glass Ceiling 11)
• Validity and Accessibility of Upside
• Estimated Reserve Life
• Location
• Technical/Mechanical Risks
• Liability Land, Environmental, Corporate

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Examples Variance in Pricing by Basin
NPV (BFIT) ()
CF MULT (MOS)
PDP /BOE (61)
/BOEPD (61)
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• Sell Side Discussion

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Keys to Successful Marketing

• Use Appropriate Marketing Process for Each Asset
• Full Exposure to the Market Place
• Fair Offering Terms
• Quality Evaluation Data Industry Standard for
  Comfort, Consistency
• Competitive Bidding Process
• Five Cs Clear, Complete, Credible, Compelling,
  Competitive

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Case Study Clearinghouse ClientComprehensive
Marketing Approach
Utilizing the appropriate marketing technique for
each asset classificationmaximizes value
minimizes discounting of the lower 20 of a
portfolio
Seller
The Clearinghouse
79 MM
Negotiated Packages

• Portfolio Analysis
• Marketing
• Recommendations
• Packaging of Properties
• Presentation to Market
• Normalize negotiate offers

• Established divestiture criteria
• Identified divestiture properties

25 MM
Mid-ValueNegotiated Packages
Hybrid Live/Internet Auction
23 MM
Marketing
Pre-offering Estimated Value 105 MM
127 MM Actually Realized
E-Mail Notifications, Memoranda, Technical
Brochures, Live/Electronic Data Rooms,
Live/Internet Auctions
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Divestment Process Considerations
Client Objectives
Property Characteristics
Market Conditions
Value Work Commitment Timing Consideration Terms
Operated/Non-operated Producing/Non-producing
Ratio Geographic Location Concentration Transactio
n Value
Capital Markets Product Pricing Competing
Opportunities Consolidation/Expansion Market
Perception
Evaluation Marketing Process
Mid-Value Negotiated
Hybrid Auction or Exclusively Online Absolute
or Minimum Bid
Negotiated Sale Packages
Clients Desired Results
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Divestment AlternativesUS Canada

• Negotiated Transactions
• Geographically consolidated packages
• PDP /or with substantial reserve upside
• gt 20 MM property packages or companies
• Technically or operationally complex
• Mid-Value Negotiated Transactions
• 5-25 MM with material reserve upside
• Operated non-operated working interests
• Auctions
• Geographically diverse
• Operated non-operated working interests
• Premiums for royalties minerals
• Individual property values 0-20 MM
• Primarily PDP reserve (70)

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Marketing Process Options
Complex
Negotiated
Technical Commercial Difficulty of Transaction
MVN
Auction
Simple
AUCTION
500 MM
0
Transaction Value
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• Buyer Process Guidelines

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Purchasing Producing Assets

• Specify Corporate Objectives Priorities
• Identify Assets that Fit
• Evaluate Reserves Other Value Keys
• Determine a Purchase Price that Meets Specified
  Objectives
• Determine Optimum Process (Time, Person, Level)
  for Approaching Seller
• Make Clear, Compelling Offer
• If Successful, Conduct Due Diligence to Confirm
  Assumptions Lead to Closing

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AD Industry Overview

• Activity Levels Have Been Strong but Not
  Exceptional
• All-time high in 2007 for asset sale activity and
  acquisition prices
• Acquisition prices actually fell somewhat
  mostly from first ½ of year
• AD environment is relatively active
  Obama/Clinton Factor
• Some of the most active historical buyers are now
  digesting
• Asset Type is Driving Factor
• Strong preference for resource plays Shales,
  Cotton Valley, Permian Basin
• High rate/short lived reserves are out of favor
  Gulf Coast
• MLPs Are (Were?) in the Forefront
• Strong buyers of long-lived, well-developed
  reserves
• Existing MLPs facing challenges with
  distributions, maintaining acquisitions pace
• New MLP formation has basically died
• Stock prices have fallen 20-40 in last six
  months equity leverage is gone
• Abundance of Capital
• Most EP companies have been unable to spend cash
  reserves fast enough
• Private equity available (25 B?) in record
  amounts but not enough takers

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AD Industry Overview

• Product Prices
• Oil is at unbelievable 120 per barrell gas
  prices nearing 12 / Mcf
• NYMEX futures continue to be strong
• Companies have adjusted to current price
  environment
• Price comfort Tax Uncertainty AD activity
• Outside Factors
• Overall economy is slowing Inflation driven by
  energy cost
• Geopolitical factors will continue to influence
  market
• Canadian companies looking for US opportunities
  developing entry strategies
• Weather This winter was 18 colder than normal
• Election Concerns over treatment of industry in
  future
• Prognosis
• Little change in AD appetites and preferences
  (pending election)
• Prices have been resistant to outside factors
  for how long?
• Strong likelihood of increased corporate
  acquisitions by hungry buyers
• No change in sight for preference for resource
  plays

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Contact Information
Canada Calgary, Alberta Dave Horn -
President 2100, 639-5th Ave. SW Calgary, Alberta,
Canada T2P 0M9 Phone [phone] Fax
403.775-1801
United StatesHouston, TX Kenneth R. Olive, Jr. -
President CEO Geoff Roberts Sr. VP
Negotiated Transactions Ron Barnes - Sr. VP,
Business Development Kevin Townsend Client
Relations Manager P.O. Box 671787, Houston, TX
77267-1787 390 Benmar, Suite 100, Houston, Texas
77060 Phone [phone] Fax
281.873.0055 Dallas Jim Henry Client Relations
Manager Ph 214.696.6470 Cell 214
.455.1573 jhenry_at_ogclearinghouse.com Denver John
Klee Client Relations Manager Ph
303.744.8220 Cell 303.263.1946 jklee_at_ogclearingh
ouse.com Oklahoma City, Oklahoma Bob Dawson
Client Relations Manager Ph 405.728.2398 Cell
405.650.1266 bdawson_at_ogclearinghouse.com