F inancing strategies for the oil and gas industry

1. Financing strategies for the oil and gas industry Erika R. GrovesAttorney Steptoe & Johnson PLLC11 Grandview Circle, Suite 200Canonsburg, PA 15317 O: 724-873-3177 F: 724-873-3140 erika.groves@steptoe-johnson.comwww.steptoe-johnson.com

2. STRUCTURING BANK FINANCING • Who is the proposed Borrower? Many oil and gas operators establish numerous related and affiliated entities to raise capital and operate various aspects of their businesses. Thus, it is important to identify the proposed Borrower and then determine its management structure; ownership of assets and collateral; debts and obligations; and sources of income. • Will the credit require a guarantor? How are such guarantors affiliated with your borrower?

3. STRUCTURING BANK FINANCING • What if your borrower is not the operator? • It is important to know how your borrower is related to the operator. • Knowing how the relationship between the operator and your borrower works will help determine what collateral you need to secure the loan. • Ownership of leases, ownership of wells, drilling operations, storage and transportation operations, gas sales contracts and other related components of the entire process can be divided among different entities, so a clear understanding of all entities involved in the process and their ownership of collateral is critical in order to properly structure a loan.

4. Basic Issues for Structuring • Common types of collateral for an oil and gas loan • Production: in pipelines, and/or in tanks • Sales Contracts and other proceeds • Gas gathering/transmission systems or rights • Royalties: direct, or override • Joint Operating Agreements • Drill Sites • Operating Equipment • Working, Fee or Leasehold Interests • Fee Interests • Severed Mineral Interests

5. Basic Issues for Structuring • How will the use of proceeds be monitored and will operations be monitored? • Events that can jeopardize the stream of income to repay the loan: • The operator fails to make royalty payments to the oil and gas owners, causing the forfeiture of the lease; • The operator becomes unable to get the product to market, drying up the revenue stream; • The operator fails to comply with the drilling period set forth in the lease, causing the lease to expire; • If a well is not drilled before the end of the primary term of a lease, the lease may expire.

6. Documenting the Loan • Basic documentation: • Promissory Note(s) • Real Property Mortgage or Deed of Trust • Personal Property Security Agreement • Loan Agreement or Credit Agreement • Collateral Assignment or Pledge of other types of interests

7. Documenting the Loan • Equity Interest Pledges • UCC Filing (both personal property & fixtures) • Guaranty • Operational Documentation • Leases, permits, bonds, contracts, etc. • Can combine Mortgage/Deed of Trust, Security Agreement, Collateral Assignment, Mineral Filing and Fixture Filing in a single document

8. Documenting the Loan • Lien Perfection Avoid lien perfection issues by using a document or documents which will cover the collateral regardless of whether the collateral is considered real property or personal proper, i.e., use a mortgage/deed of trust, security agreement and assignment, as well as a mineral filing, fixture filing and UCC financing statements.

9. PRIVATE EQUITY FINANCING FOR THE OIL AND GAS INDUSTRY How Do Private Equity Funds Invest? • Equity Line of Capital • Platform Investments • Acquisition of Private Company • Minority / Passive Investments • Buyouts • Debt and Debt-like Investment

10. Line of Equity Equity Line of Capital Investment • An investment structure where one or more private equity sponsors agree to provide the primary source of capital to a portfolio company, over time and subject to negotiated conditions, through the funding of an “equity line of capital” in exchange for equity at a fixed price.

11. Mezzanine Financing • Mezzanine financing is generally described as the tier of capital structure between the senior secured bank debt and common equity. • A mezzanine lender is typically an alternative lender such as a private equity fund or hedge fund. • Mezzanine financing provides unique advantages and drawbacks for the borrower: • Advantages - ability to access capital when traditional bank financing is unavailable; • Disadvantages - more onerous covenant packages and tighter controls over the use of proceeds than a traditional loan structure.

12. Graphic Depiction of Mezzanine Financing

13. STRUCTURE OF MEZZANINE FINACING Hybrid Structure • Debt: Typically structured as term loan. • Equity Kicker: Allows the lender to partake in more potential upside returns by receiving either a real property interest in the oil and gas properties or an equity interest in the borrower itself. • Interest Rate: Typically higher than more traditional financing mechanisms

14. Thank You! Erika R. GrovesAttorney Steptoe & Johnson PLLC11 Grandview Circle, Suite 200Canonsburg, PA 15317 O: 724-873-3177 F: 724-873-3140 erika.groves@steptoe-johnson.comwww.steptoe-johnson.com Steptoe & Johnson PLLC