Evolution of Capital Sources – Building an Oil & Gas Company with Mark A. Welsh IV

October 25, 2012

214-599-0800 [email protected] New Technologies and Practices

“This is our most successful project. When we dug the footing for the wind turbine, we struck oil.”

2 Table of Contents

Section I Introduction to EnCap

Section II Private Equity Overview

Section III Building Oil & Gas Companies with Private Equity

3 Section I Introduction to EnCap EnCap L.P. Overview

. Founded in 1988, EnCap is a leading provider of to the upstream and midstream sectors of the U.S. oil and gas industry

− Aggregate capital commitments of $13 billion across 16 funds

. strategy revolves around partnering with seasoned oil and gas executives with demonstrable track records

− Portfolio companies focused on creating strategic acquisition opportunities for ultimate buyers

− Provided growth capital to 195 oil and gas companies

. Track record of 2.7x ROI on 143 realized investments with limited loss history

5 EnCap Portfolio Companies

Williston International

Rockies Mediterranean Resources Appalachia

Mid Continent

West Texas

N. LA/E. Texas

Oak Valley Energy Management South Texas Gulf Coast/GOM

RESOURCES

6 Section II Private Equity Overview Cross-section of EnCap Investors

Pension Funds Trusts / Foundations University Endowments

CalSTRS Howard Hughes Medical Inst. University of Texas (UTIMCO)

Texas Teachers MacArthur Stanford

New Mexico PERA Parkland Hospital Dartmouth

Michigan State Texas Children’s Hospital NYU

Canadian Pension Plan MIT Companies Corporate Pensions Notre Dame Liberty Mutual 3M University of Virginia

Lincoln National Life Abbott Labs University of Michigan

Travelers NFL Sovereign Wealth Funds

Nationwide Raymond James

Northwestern Mutual Raytheon Family Offices

8 Asset Allocation of Typical Pension

Cash Other Private Equity 2% 1% 14%

Real Estate 14% Public Equity 51%

Asset Market Value Category ($MM) Public Equity $79,365 Fixed Income 28,140 Fixed Income Real Estate 21,865 18% Private Equity 21,950 Cash 3,046 Other 994 Total Investment Assets $155,360

Source: http://www.calstrs.com; for the period ended September 30, 2012 9 Putting it into Perspective

Private Public Equity Equity Total Size (1) $3 trillion $53 trillion

New Funds (2) $300 billion raised $556 billion annual annually issuance

(1) Source: Public Equity, which represents aggregate market capitalization as of 9/30/2012, is per World Federation of Exchanges. Private Equity, which represents aggregate , is per Preqin Q3 2012 Quarterly Private Equity Update. (2) Source: Public Equity, which represents first nine months of 2012 ($417.03 billion) annualized, is per Bloomberg. Private Equity, 10 which represents new funds raised in 2011, is per Preqin Q3 2012 Quarterly Private Equity Update. Oil and Gas Private Equity – Fundraisings

Current & Recent North American Oil & Gas PE Fundraisings

Firm Target Size ($MM) First Reserve $6,000 Riverstone Holdings 6,000 EnCap Investments 4,250 NGP Energy Capital Management 3,586 CCMP 3,500 Blackstone Group 3,000 Energy & Minerals Group 2,500 GS Capital Partners 2,000 Kayne Anderson Capital 1,600 Lime Rock Partners 1,400 Apollo 1,250 Oppenheimer Alternative 200 Total $35,286

Source: Preqin as of 8/30/12 11 A&D Activity, E&P Capital Spending and Market Size

Historical and Projected A&D Activity and E&P Capex

$180.0 $163.7 $160.0 $153.9 . The aggregate equity market capitalization of Barclays’ E&P $140.0 $137.2 $127.6 research universe is $120.0 $111.8 approximately $467 billion

$100.0 $93.7 . From Q1 2009 through Q2 $80.0 $ in in $ billions 2012, the E&P universe raised $56.7 $56.6 $60.0 $53.1 approximately $142 billion of $44.3 $44.0 $40.0 public financing, consisting of $105 billion from debt and $37 $20.0 $15.2 billion from equity – 2007A 2008A 2009A 2010A 2011A 1H 2012E Annualized (1) (2) A&D Activity North American E&P Capex

(1) Source: RBC Richardson Barr (2) Source: Barclays Capital (3) Source: RBC Richardson Barr; Includes only U.S. onshore transactions of $20+ million since January 1, 2010 12

Companies That Have Utilized Private Equity

13 Section III Building Oil & Gas Companies with Private Equity Building Oil & Gas Companies with Private Equity

. Partner with the best management teams in the oil and gas business

. Capture investment opportunities with superior economic outcomes

. Manage risk

. Amass an asset base that is attractive to the buying universe

15 Partner With the Best Teams Management Teams Are The Cornerstone of Our Business Model

16 Partner With the Best Teams (cont’d) What do we look for in a management team?

 Honesty, integrity and forthrightness

 Strong technical, operational and business backgrounds

 Track record of value creation – i.e. “Proven Moneymakers”

 Well-defined business plan with viable, creative value creation strategies  Strategy consistent with experience of team

 Adaptability

 Shared view of risk management

 Receptive to “partnership” relationship

 Entrepreneurial mindset

17 Entrepreneurial Mindset

18 Capturing Opportunity

. Acquire and Exploit

− Acquisition of proved reserves with a focus on improving operations, exploiting undeveloped reserves and identifying further upside through field studies

− Acquisition of development opportunities from companies that need to de-lever and/or focus on core assets

− Can be an “Asset Enhancer” or “Asset Aggregator/Consolidator”

. Lease and Drill

− A rapidly growing strategy given the onset of the resource plays

− Acquisition of acreage in known producing provinces. As drilling success warrants, capital program is “ramped up” for acreage and drilling

− Value creation through the application of advanced drilling and completion technologies to conventional and unconventional reservoirs

− Can be an “Early Mover” or “Fast Follower”

19 Lease and Drill Strategies – Technical Considerations

Are hydrocarbons in place? • Richness (TOC %) • Maturity • Kerogen Type

…in sufficient quantities? • Thickness • Porosity • Lithology • Consistency and extent

…are they producible? • Historical tests or production • Permeability • Pressure • Recovery factors

…at economic rates with modern technology? • Lateral length • Frac design • Production optimization • Costs and economics

20 Managing Risk

 Make disciplined entry decisions (price deck, type curve, probabilistic range of outcomes)

 Advance capital incrementally

 Monitor performance results

 Drilling look-backs

 Hard value vs. invested capital

 Limit downside risk through:

 Hedging of producing assets

 Limited leverage

 Having excess capital available

 Sell at earliest opportunity once target returns are achieved

 Be ready and willing to adapt

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Managing Risk Adaptability to Dynamic Market Environment Over Time Creates Value

Fund IV (2001 Vintage) Fund V (2004 Vintage) Fund VI (2006 Vintage) Fund VII (2007 Vintage) Fund VIII (2010 Vintage)

23% 34% 35% 42% 43% Oil/Liquids 58% 57% Gas 66% 65% 77%

18% 15% 13% 27% Hz Drilling & Advanced 36% Completion Techniques Conventional Drilling 64% 73% 82% 85% 87%

17% 21% 23%

Acquire & Exploit 47% 45% Low-Risk Drilling 53% 55%

77% 83% 79%

Note: Charts are based on invested capital for realized and unrealized portfolio. Oil/Gas mix is based on proved reserve volumes and targeted acreage plays at a 20:1 MCF/BO ratio. Classification of individual deals within each fund as Horizontal/Vertical Drilling or Acquire & Exploit/Low Risk Drilling is based on where the majority of capital 22 has been spent. Charts exclude midstream & royalty focused investments. Exit Dynamics E&P Food Chain

Well Private Small Mid Large Owners Operators Caps Caps Independents Majors

23 EnCap Investments L.P. Building Attractive Assets

. Amass asset base that is attractive to the buying universe

− Compelling economics

− Scale and repeatability

− Lower risk drilling

− “Proven” recoveries

. Properly capitalize company to hold and be ready to develop assets through difficult market conditions if necessary

24 EnCap Portfolio Company Sales Since 2008

Company Buyer Date Gross Sales Price ($MM) 1 Paloma Barnett Chesapeake Jan-08 $239.7 2 Bold OXY Petroleum Mar-08 94.0 3 OGX Legend Natural Gas III Mar-08 173.5 4 Petroedge Quest Resource Jul-08 140.0 5 O'BENCO Berry Petroleum Jul-08 670.0 6 Riverstone Chesapeake, Petrohawk Aug-08 136.0 7 Cordillera II Forest Oil Corporation Sep-08 1,023.5 8 Protégé Forest, EV Energy Aug-08 93.9 9 Empresa Chesapeake Jul-09 400.7 10 Lobos N.A. Oct-09 182.4 11 Common BG/EXCO, Talisman May-10 805.0 12 Core Minerals CountryMark May-10 69.0 13 Oasis Public (NYSE: OAS) Jun-10 1,259.4 14 Lone Star Enerplus Aug-10 131.5 15 Enduring Talisman, Statoil, Cabot Oct-10 1,738.6 16 Empresa II Chesapeake Oct-10 125.0 17 Limestone Energen Oct-10 185.0 18 Talon Enervest Dec-10 1,021.0 19 Tracker/Red Arrow Hess Nov-10 1,050.0 20 Piedra Berry Petroleum May-11 99.4 21 Marquette Hess Sep-11 750.0 22 OGX II Concho Oct-11 250.0 23 Plantation IV N.A. Oct-11 331.2 24 Eagle Comstock Dec-11 332.7 25 Cordillera III Apache Jan-12 3,100.0 26 Meritage Howard Energy Feb-12 215.7 27 Caiman Williams Partners Feb-12 2,500.0 25 Paloma II Marathon Aug-12 750.0 26 Common II Apache Aug-12 213.5 27 Halcon Secondary Offering Sep-12 269.0 28 Pending - Confidential Undisclosed N/A 590.0 Total $18,939.6

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