Drilling Capital for
the Small Producer
Wells Fargo Energy Capital, Inc.
Michael Nepveux
Managing Director
Williston Basin Petroleum Conference
Bismarck, North Dakota
May 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.
Key facts1
Assets
Rank by assets
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.
1 Company
data as of March 31, 2012
4th
Among U.S. Peers
Rank by value of stock
1st
Among U.S. Peers
Rank by value of stock
3rd
Among global financial institutions
Market value of stock
Team members
Our vision
$1.3 trillion
Customers
Fortune 500 rank
$177.6 billion
270,000
More than 70 million
23rd
Among all companies, by revenue
Total stores
More than 10,000
North America
ATMs
#3 branded bank ATM owner
More than 12,000
Wells Fargo serves consumers and businesses in more
communities than any other U.S. Bank
Wells Fargo strength
$177.6
$167.6
$156.2
$102.7
$95.7
$82.6
$60.3
$60.2
$48.3
JP Morgan
Numbers in billions
Market capitalization as of
3/31/12
Source: Capital IQ
HSBC
Citibank
Bank of
America
RBC
Capital
Markets
Goldman
Sachs
US Bank
UBS
$42.9
Barclays
$41.8
Deutsche
Bank
$35.3
$32.8
Morgan
Stanley
Credit
Suisse
Wells Fargo Energy
Group Overview
Wells Fargo Energy Group Commitments
16%
E&P
Refining and
Other
Midstream
Oilfield Services
$30B
27%
52%
*estimated data
5%
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

$30B of credit committed to Clients

Relationship Manager is the primary contact into all the various solutions of the bank
including:
– Credit and capital solutions
– Treasury management
– Asset management
– Risk management
– Receivables Management
– Corporate Services
– Second Lien, Mezzanine and Equity - Wells Fargo Energy Capital
Deposit products offered by Wells Fargo Bank, N.A. Member FDIC.
Wells Fargo has the #1 Energy Non-Investment Grade
Debt Capital Markets Platform
Volume of Energy Transactions (2010 -2012 YTD)
($ in Billions)
$60
$58
$54
$50
$42
$40
$30
$20
$16
$15
$14
$11
$8
$10
$0
JP Morgan
W ells Fargo
Bank of
America
Credit
Suisse
Bank of America
RBS
RBS
RBC
Citi Bank
Citi
Barclays
$7
Morgan
Stanley
$7
$6
UBS
Morgan Stanley
Deutsche
Bank
$3
Goldman
Deutsche Bank Sachs
Note: Includes Lead Arranged Syndicated Loans and Bookrun High Yield deals. Loan data through 12/31/11 and High Yield
data through 04/11/12
Source: Loan Pricing C orporation, S&P/LC D, Dealogic and Wells Fargo Securities
7
Wells Fargo has the #1 Energy Non-Investment Grade
Debt Capital Markets Platform
2011 Loan Syndications –
Energy Lead Arranger
Full Credit to Bookrunners (by Deals)
($ in Millions)
Rank
1
2
3
4
5
6
7
8
9
10
Institution
Wells Fargo
Bank of America
JP Morgan
BNP Paribas
RBS
BMO
Citi
RBC
Deutsche Bank
US Bancorp
No. of Deals
Volume
116
76
75
63
23
18
15
14
11
10
$26,453.6
16,722.4
27,110.0
21,396.9
4,174.6
3,238.3
2,865.8
5,340.0
1,177.2
839.5
Source: Loan Pricing Corporation and Wells Fargo Securities
Wells Fargo has the #1 Energy Non-Investment Grade
Debt Capital Markets Platform
2011 High Yield Energy League Table
Book-Managed Deals (by Deals)
($ in Millions)
Rank
1
2
3
4
5
6
7
8
9
10
Underwriter
Wells Fargo
Bank of America
JP Morgan
Credit Suisse
Barclays
RBC
RBS
BNP Paribas
Morgan Stanley
Citi
No. of Deals
Volume
39
38
38
25
19
19
19
18
15
14
$4,994.0
4,990.0
4,361.5
3,453.2
2,797.9
2,120.9
2,369.4
1,736.4
3,639.6
2,643.6
Source: Wells Fargo Securities and Dealogic
Wells Fargo has the #1 Energy Non-Investment Grade
Debt Capital Markets Platform
2012 YTD High Yield Energy League Table
Book-Managed Deals (by Deals)
($ in Millions)
Rank
1
2
3
4
5
6
7
8
9
10
Underwriter
Wells Fargo
Credit Suisse
JP Morgan
Citi
Bank of America
Deutsche Bank
RBC
RBS
Barclays
BMO
No. of Deals
Volume
22
20
17
17
13
13
12
10
10
8
$2,750.1
2,807.6
2,409.6
2,376.7
1,902.9
1,666.3
1,632.6
1,590.9
1,242.6
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
Williams
Petrobridge
Lehman
Guggenheim
Enron
KCS
Stratum
Deutsche
Bank
Duke
D.E. Shaw
Silverpoint
Carlyle
EIG (TCW)
RIMCO
Torch
MG
Tenneco /
Range
GE 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
Wells
Fargo
Aquila
Macquarie
NGPC
Beacon
Mirant
Denham
CIT
Cambrian
Koch
Williams
Petrobridge
Lehman
Guggenheim
Enron
KCS
Stratum
Deutsche
Bank
Duke
D.E. Shaw
Silverpoint
Carlyle
EIG (TCW)
RIMCO
Torch
MG
Tenneco /
Range
GE 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.
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
Subordinated
Debt, Equity
Syndicating
Senior
Revolver
Senior
Revolver
Development
Loan, Equity
Start-Up
Development
Acquisition
Development
Risk / Return Matrix
Target Rate of Return %
35+
Equity
30
(Public & Private)
25
Mezzanine Debt
20
(Development Drilling Loans)
15
Second Lien Debt
10
WFEC
Public Debt (High Yield)
5
Bank Loan
(Senior Debt)
0
WFB
Low
High
Risk
Definition of Mezzanine Debt
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.
 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
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 you
Michael Nepveux
Managing Director, Wells Fargo Energy Capital
303-863-5589
michael.nepveux@wellsfargo.com