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Charting New Territory

Charting New Territory. January 14, 2009. Strength and Stability. Wells Fargo continues to be one of the strongest and best capitalized banks

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Charting New Territory

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  1. Charting New Territory January 14, 2009

  2. Strength and Stability • Wells Fargo continues to be one of the strongest and best capitalized banks • Our unchanging vision, values and time-tested business model will guide us into the future and are—now more than ever—a competitive advantage as our industry evolves • Our capital ratios and credit ratings are among the strongest of our industry peers • Our average products per retail and commercial customer are at record highs • We’re known and admired for our conservative financial position • As a testament to our strength, Wells Fargo was able to raise $12.6 billion of equity in the largest non-IPO offer ever Based on third quarter results for peers.

  3. Year Established: Lending to the Energy industry for 30+ years Office Locations: Houston, Dallas, Denver, Charlotte, New York 13 in-house engineers and technicians Total Commitments: exceed $20B Complimentary Strengths: Investment Banking Capabilities Strong Private Capital Focus About Wells Fargo Energy Group

  4. Powerful Combined Platform

  5. Risk/Return Matrix 35+ Equity 30 25 Mezzanine Debt (including sub debt and development loans) 20 Target Rate of Return % 15 10 Bank Loan 5 0 ----------- Exploration ------------ (Geologic/Geophysical Risk) ----------- Development/Exploitation ----------- (Engineering Risk) PDP PDNP PUD Probable Possible Reserve Risk

  6. Current Market Update • Sub-prime mortgage crisis hits CLO market in June / July, causing one of the largest corrections in 20 years • Bear Stearns, BNP and other institutions freeze funds; bank run on Northern Rock • Strong credit borrowers tap CP back-up facilities as a result of instability in the credit markets • Banks report billion dollars of write-downs, with UBS and Merrill leading the pack, and raise capital from foreign sovereign funds, hedge funds and money managers to bolster their capital bases • Crude= $82.80/ NatGas= $6.57 (Average) • Bear Stearns, once the fifth largest investment bank in the U.S., collapses and the Fed intervenes to support JPMorgan’s purchase of the failed institution • Fed cuts the Federal Funds target rate by another 200 bps collectively over three occasions and opens the discount window to investment banks • Banks continue to report huge write-downs, with Citi’s $18 billion and UBS’s $18.4 billion write-downs sending shock waves to the financial markets • Auction rate security market fails, sending both holders and issuers of ARS scrambling for funds • Crude= $97.91/NatGas= $8.66 (Average) • Loan defaults rise to 2.58% as of June 30, up 232 bps since end of 2007 • Financial institutions sell off assets at prices significantly below par, cut dividends, and raise more capital to shore up their capital bases • Credit ratings of Morgan Stanley, Merrill, Lehman, MBIA and AMBAC get cut • Crude oil prices rise exponentially (up 44.55% YTD), as investors flee to the commodities market to combat inflation, causing more stress on the U.S. economy • Crude= $124.06/NatGas= $11.39 (Average) 2nd Half 2007 Panic and Losses Start to Show Q1 2008 Losses continue to rise Q2 2008 Officially in Bear Territory Source: Various news articles

  7. Current Market Update • Third quarter will be remembered for the final weeks of September: • Sept. 9th the government bails out Fannie Mae and Freddie Mac • Sept. 15th Lehman files for bankruptcy • Sept. 15th Bank of America acquires Merrill Lynch • Sept. 16th the Fed lends $85 billion to AIG • Sept. 18th Lloyds acquires HBOS • Sept. 19th U.S. Treasury announced a temporary guarantee on money market mutual funds • Wells Fargo agrees to buy Wachovia • Failure to pass $700 billion Troubled Asset Repurchase Plan (“TARP”) causes unprecedented turmoil in the financial markets. • Crude= $124.06/ NatGas= $11.39 (Average) • Fourth quarter began with Congress passing the $700 billion Troubled Asset Repurchase Plan • Passing of the TARP lead to the end of the Investment Bank era as Goldman Sachs and Morgan Stanley applied to become bank holding companies in order to tap in to the government funds • In a coordinated move, the Federal Reserve and other central banks reduced lending rates around the world • The Fed’s benchmark interest rate was cut to the lowest in history at 0.0% to 0.25% • S&P downgraded credit ratings of eleven top global banks • Autos look to tap into TARP plan, with GMAC receiving $5 billion in funds • Primary loan syndication market essentially closed • Wells Fargo officially acquires Wachovia as of December 31, 2008 • Crude= $60.44/ NatGas= $6.67 (Average) Q3 2008 A Bad Market gets Worse Q4 2008 A Bad Market gets Worse Source: Various news articles

  8. U.S. Overall Syndicated Loan Issuance by Purpose1Q05-4Q08 Credit Crisis Effect

  9. Current Market Update • Pro-rata (primarily bank only) volume. With institutional volume trending downward even more quickly than overall activity, pro rata loans grabbed 61% of total loan volume in the fourth quarter –up from 53% in the third quarter and from 53% during the first half. For the full year, the pro rata loan share jumped to a six-year high of 53%, from a record-low 28% last year. • Institutional volume -down 94%.For all of 2008, institutional activity dropped 82%, to a six-year low of $71 billion, from the record $387 billion established in 2007. • LBO transaction volume. Total transaction volume fell to $3.2 billion in the fourth quarter, a 97% drop from the final three months of 2007 • Amendments. While new-issue volume has fallen, amendment activity has exploded. Amendments have caused spreads to increase by an average of 200.0 bps. Source: LCD Quarterly Review

  10. Crude Oil Price Deck Comparison Top 5 Banks

  11. Natural Gas Price Deck Comparison Top 5 Banks

  12. Bank Market Update (as of 2008) • Of the 23 banks we spoke to: • Only 14 are in the market for new deals • Of those 14, 10 say that they are open to deals only if priced “very well” • Comments heard across the board include: • “More selective on first lien names, needs to be middle of fairway, no to stretch” • “Accommodate existing loans and not encouraged to grow book for new lenders until gets more direction in 2009” • “Can't see anything changing/improving until at least the second half 2009 (not like in past where each January gets a clean slate and a new budget) • “Concerned about next Borrowing Base Redetermination season and tight liquidity for some borrowers.” • “Very high hurdles” • “Even if return meets hurdle, needs ancillary business out of the blocks; leaning more to public deals since more capital markets opportunities

  13. Our View on the 2009 Bank Market • Where we are today: • Hearing much of the same from last month • Many lenders are conserving their capital to support only existing clients • It is now “an understood” that pricing will go up • Lenders with more levered borrowing bases being told that the price deck could severely limit availability in 2009 • Beginning to see expected covenant breaches for 2nd and 3rdquarters • Relative value continues to be a hot topic

  14. Conclusion What we are expecting from lenders still doing new money deals in 2009: • 3 year is the max on E&P (and likely for midstream) due to tenor premiums • Big unknown unused commitment fees due to tenor premiums: Euro banks are expecting 20-30% of drawn margin….37.5 to 50 bps may be the new floor. • Price Decks for crude are down approximately 30% from September and 17% for natural gas. • For next redetermination season, we expect significant decreases in borrowing bases…some property sets will be hit more than others. • E&P up front expectations are in the 75-125 range • Pricing grids for E&P companies based on usage are up 75-100bps for new money deals (L+200-300 for lenders that can actually do new money). • Expect midstream to range from 350-450 bps • Upfront fee for E&P 75-125 bps, Midstream 100-200 bps upfront • Undrawn fees are up. • Other structural aspects have tightened across the board (i.e. more and tighter covenants).

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