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TRENDS IN ENERGY LENDING

TRENDS IN ENERGY LENDING. 7 August 2008. FIRST QUARTER 2008 BANK INDUSTRY PERFORMANCE. Deteriorating real estate portfolios – loan loss provisions 4 times 1st quarter 2007 Shrinking profits - especially largest banks Lower non-interest revenues: trading and loan sales

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TRENDS IN ENERGY LENDING

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  1. TRENDS IN ENERGY LENDING 7 August 2008

  2. FIRST QUARTER 2008 BANK INDUSTRY PERFORMANCE • Deteriorating real estate portfolios – loan loss provisions 4 times 1st quarter 2007 • Shrinking profits - especially largest banks • Lower non-interest revenues: trading and loan sales • Charge-offs climbed to a five-year high • Past due loans increased 24% from 4th quarter 2007 • Of banks that paid dividends, half were lowered

  3. REPERCUSSIONS • Banks’ underwriting standards have tightened • Reasons: market liquidity/capital pressure, economic outlook, risk appetite, loan performance and the financial condition of some banks. • The impact of this tightening is seen in loan pricing, covenants, collateral, guarantor requirements, and equity requirements. • Standards that have eased…..maturity and amortization.

  4. INDICATIONSOF STRESS • Stock price of top 20 energy banks – DOWN 29% LTM (vs. 9% down for DJA) • Cost of external debt capital for banks • LIBOR + 300 bps (more for troubled banks)

  5. ENERGY SEGMENT – STILL DESIRABLE Estimated Energy Loan Commitments - Largest Energy Banks Bank12/31/0612/31/07 Citigroup $25 B $31 B Bank of America $19 B $24 B JP Morgan Chase $18 B $26 B BNP Paribas* $ 8 B $14 B Wachovia $ 6 B $ 7 B • Includes impact of currency fluctuation

  6. IMPACT OF ENERGY PRICES • Positive: Lender price decks are climbing • Median prices for oil and gas* • 2008: $70.00/$7.00 • 2009: $67.75/$6.75 • 2010: $61.25/$6.50 • 2011: $60.00/$6.25 • 2012: $60.00/$6.15 • Negative: Calculated exposure for commodity hedges has ballooned due to price volatility - exacerbates capital allocation issues. * Tristone Capital, Inc. Energy Lender Price Survey, Q3/08

  7. IMPACT OF BANKS’ STRESS ON ENERGY CLIENTS • Certain formerly stout players in the lending market have scaled back both lending and hedging • Very active secondary senior loan market • Push-back on stretch deals due to capital allocation issues • Lower hold limits on loans • Failed syndications • Fewer transactions fully underwritten • Structures becoming more conventional • Interest margin up +/- 25 bps; up-front fees higher

  8. OTHER….. • Impact of new entrants in energy lending market uncertain. • Semgroup bankruptcy – bad timing.

  9. OPPORTUNITIES • For well-capitalized banks……get your phone calls returned. • Improve position in credits at attractive prices. • Enhanced cross-sell opportunities. • Banks with hedging capacity desired. • Rewards for stepping up: sharing of bond economics and equity issuance fees.

  10. FUTURE • Some old names will exit/merge/go away. • Competition will be somewhat abated. • More banks per credit facility.

  11. QUESTIONS • Will banks’ capital crunch slow down oil and gas acquisitions? • Where does it end? • Who will be left?

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