Llc Equity Investment Agreement

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Llc Equity Investment Agreement Powered By Docstoc
					    Plexus Capital, LLC
                     An Intricately Interwoven Combination of Elements or Parts in a Cohering Structure

Navigating the Maze of Available Financing Options

                                                     New York
                                                    April 18, 2005

  Wayne Williamson               1560 Broadway, Suite 1950, Denver, CO 80202            
                                                    (303) 225-5298
                 Plexus Capital, LLC
 Formed to design and source conforming and alternative financing
  structures, minimizing the cost of capital for oil and gas producers
 Will assist the producer in determining its capital requirements and
  advise alternative solutions for accessing it
 Will assume lead role for transaction to expedite execution and
  allow producer’s management to continue to focus on current
 Previous transactions have been structured as non-recourse
  monetization of PDP assets, compartmentalizing different risks to
  enable a high advance rate at lower than market cost of capital,
  allowing the producer to retain 100% of the upside
 Previous transactions have been structured as taxable to convert
  ordinary income to long term capital gain

         Plexus Capital, LLC                                          2
    CFO’s Capital Formation
 Don’t run out of money
   • Forecasting
   • Anticipate capital requirements
 Reduce cost of capital
   • Evaluate and manage risk
   • Match risk with lender risk tolerance

     Plexus Capital, LLC                     3
   Sources of E&P Capital
 Public Markets
 • Debt
 • Equity and equity-linked debt

 Private Markets
 • Commercial banks
 • Vendors (well service, seismic, pipeline companies)
 • Individuals
 • Industry partners
 • Private institutions (direct or thru fund managers)

  Plexus Capital, LLC                                    4
     Why Hire an Intermediary?
   Internal personnel available and qualified to handle capital formation?
     •   Understanding of the current market range and cost of available capital
     •   Identifying tier/type/structure of capital that best fits the need
     •   Ability to communicate to capital markets through written and verbal presentations
     •   Ability to identify strengths and weaknesses of the internal organization
     •   What has been done before? What is reasonable to ask for?
   Time required to:
     •   Design and prepare information to present to capital markets
     •   Track process as the market of the cost of capital is determined
     •   Read and negotiate agreements
   Creates an improved dynamic in the negotiation
     •   May gain more information from the capital provider
     •   Decision maker is removed from direct negotiation creating protection from forced commitments

         Plexus Capital, LLC                                                                             5
                     Intermediary’s Role
   Help producer design the capital type and structure to source
     •    Producer risk tolerance
     •    Cost of capital

   Draft a transaction memorandum laying out the deal for prospective funders
   Model the producer entity pro forma the capital being sourced
   Arrange producer presentations to prospective funders
   Negotiate term sheets
   Ensuring the producer understands his true cost of capital and risk he is either keeping or transferring to the
   Keep producer and funder from “talking past each other”
   Recommend attorneys skilled in the type of transaction being undertaken
   Review and negotiate documentation
   Get the deal closed
   Fund expensive extravagant closing dinner
   Start to finish can vary based on complexity, where it is in the “bid/ask” spread, deadlines created by other
    transaction, experience of funder

           Plexus Capital, LLC                                                                                      6
              Attributes of a Good
 Good negotiation and communication skills
 While maintaining a good relationship with and respect of
  funders, his relationship with producers is paramount
 Knowledge of capital markets
 Knowledge of producer business, concerns, future potential
  tension points
 Persistent
 Imaginative
 Interest in getting the best deal for his client, as opposed to just
  getting a deal done

       Plexus Capital, LLC                                               7
     How Does an Intermediary
      Charge for his Services?
   EVERYTHING is negotiable! Only lack of imagination limits what can be done
   Up front retainer
     •   One time
     •   Monthly
   Reimbursement of out of pocket costs approved by client
   Success fee as a percent (1%-5%) of dollars committed or funded
     •   Conforming debt at lower end, non-conforming and equity at upper end
     •   Higher up front retainer can be traded for lower success fee
     •   Size of deal
   Tension points in engagement:
     •   Exclusivity of representation
     •   Term of tail period for additional fundings after initial closing
     •   Indemnification

          Plexus Capital, LLC                                                    8
 Understanding Cost of Capital
 Weighted Average Cost of Capital
    •   Conforming bank debt (coupon, front end fee, commitment fee, admin fee)
    •   Sub debt (coupon, front end fee, commitment fee, ORRI, warrants, back-ins)
    •   VPP (discount utilized for calculating purchase, additional spread on hedges)
    •   Preferred Equity (coupon, expected equity growth rate)
    •   Equity (new equity or current owner’s equity)
    •   Need to consider term (floating vs fixed), front end fees
 Subjective values:
    •   Transaction closing risk
    •   Speed of execution
    •   Future availability of capital from funder
    •   Call on capital

         Plexus Capital, LLC                                                        9
                            Cost vs Risk

             Conforming                    Mezz                   Equity

                               Cost of Capital    Relative Risk

      Plexus Capital, LLC                                                  10
    Conforming Debt Attributes
 Advance 50% – 75% (60% - 65% is typical) risked proved PV10 at
  higher of bank pricing or hedge price
 Senior secured
 Payout within half life of reserves
 Maximum term 8 years
 Coupon at Prime or Libor + 100 to 300
 Borrowing base review 2 times per year
 Proved non producing limited to 20% of borrowing base
 Single property no more than 15% of value
 Single bank hold limit $25MM - $50MM

        Plexus Capital, LLC                                  11
  Private Mezzanine Attributes
 Limit total debt to 100% PV10 PDP at higher of institution pricing
  or hedge price
 Subordinated secured, requires inter-creditor agreement with
  senior lender
 No corporate governance issues
 Covenants similar to senior debt
 Cost from Libor + 400 to 25% total cost of capital including ORRI
  or other equity kickers
 May allow a portion to revolve
 1-2 months to complete financing

       Plexus Capital, LLC                                         12
      Private Equity Attributes

 Investment focus is on Management
 3-7 year investment time frame
 Active corporate governance, board representation, control
 Management receives 10-35% back-in after 8-25% IRR
 Meaningful investment from management
 3-6 months to complete financing

      Plexus Capital, LLC                                      13
         Private Capital Sources
                              (several play in both groups)

Equity Providers                         Mezzanine Providers
Altira Group LLC                         Ableco Finance LLC
ARC Financial                            AIG Financial Products Corp.
ArcLight Capital Partners, LLC           Axiom One L.L.C. (a J.M. Huber Co.)
Camcor Capital Inc.                      BlackRock Energy Capital
Canfund VE II Mgmt. Ltd.                 Constellation Power Source
Darby Latin Am. Mezz. Fund, LP           Crown Capital Partners Inc.
Encap Investments                        Foothills Capital (affiliated with Wells Fargo)
Energy Spectrum Partners LP              Liberty Mutual
GE Capital                               Macquarie Energy Capital
Goldman Sachs                            Petrobridge Investment Management LLC
Greenhill Capital Partners, LLC          Prudential Capital Group
Kayne Anderson Capital Advisors          Standard Bank of So. Africa
Lime Rock Partners                       TCW Asset Management
Morgan Stanley Private Equity            UnionBanCal Equities, Inc.
Natural Gas Partners                     Wachovia Capital Partners
QUANTUM ENERGY PARTNERS                  Wells Fargo Energy Capital
Riverstone Holdings LLC
SCF Partners
Warburg Pincus
Yorktown Partners LLC
        Plexus Capital, LLC                                                                14
Example of Recent Unusual
               Financing Structure

                                                              Credit Support

                                 Secured Loan            Mortgage                      Commodity

                                                                         Interest Rate

                  Subordinated Note             Producer                                 Insurance
Producer                                                       Financial Guaranty
                  Cash Purchase Price             SPE                                    Company
                                                               Guaranty Fee

    Plexus Capital, LLC                                                                                16
Structure Benefits for Producer
 Converts ordinary income to long term capital gain
 Lock in historically high gas prices without risk of margin calls
 Potentially higher advance rate than conforming commercial
  bank loan
 Financing is recourse only to subject properties
 No inter-creditor issues
 Diversifies capital structure
 Producer retains all property upside
 Vehicle for wealth transfer in estate planning

       Plexus Capital, LLC                                            17
PV Tax Savings for Various Reserve Profiles

   Percent of Future Discounted Tax Saved








                                                  1.38   2.25                      3     4
                                                         Half Life of Reserves (years)

                                                            PV5       PV10        PV20

  Note: Compares 15% capital gains rate to 38% ordinary tax rate.

                        Plexus Capital, LLC                                                  18
                            A Few Pearls
 Create competition for your transaction
   • Don’t assume a lender will not be interested in your type of
   • Ping as many lenders as you can, then focus on the 2 – 5 best fits

 Try to convince lower risk/lower cost lenders to move
  up the risk spectrum
   • Lenders with minimum return will not accept lower return, regardless
     of lower risk
   • Possible to get lenders to accept more risk for slightly higher return

 Find out what the lender’s return criteria is and what
  they value

      Plexus Capital, LLC                                               19
                 A Few More Pearls
 Identify your assets/attributes (what you have to give)
  and find the lender that values them
   • Other non-producing assets to pledge or value (seismic, equity in
     other enterprises, equipment, commitment of equity from VC)
   • Geographic concentration of production
   • Analyze and measure the risked value of your assets so the lender
 Always negotiate a detailed comprehensive term
   • Reduces legal cost
   • Insures you have a deal before you invest too much time and legal
     costs to walk away
 Get senior lender to provide additional margin facility
  for hedging with non bank counterparties

      Plexus Capital, LLC                                            20

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