ipaa │2009 Private Capital Conference
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Transcript of ipaa │2009 Private Capital Conference
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ipaa │2009 Private Capital Conference
Surviving and ProsperingIn Uncertain Times
January 14, 2009
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Overview of ESS Funds Group
• Energy Special Situations Funds est. late 2005• Two institutional funds - $340+ million• Pursue middle-market, energy opportunities• 13 investments since inception• $150+ million uncommitted capital• Fund managers:
Jon Linker, Jeff Hewitt, Tim Sullivant
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ESSF Strategy
• Invest in companies/projects - all energy sectors – Seek growth and value creation
• Sole manage small investments ($5 - $40 mm)• Partner large deals ($30 - $150 mm); 5 co’s.• Management track record and co-invest are key• Structure, incentives create common objectives• Equity-oriented - all financial structures possible
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Our E&P Portfolio• 10 entities with 8 management groups• Highly-focused niche strategies
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What Will 2009 Bring?
“Every new beginning starts from some other beginning’s end …”
Dan Wilson, Semisonic
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Past 3 Cycles Lasted 4-6 YearsNormalized OSX Index with Peak = 100
• Peak-to-Trough value increase: 3x–4x
• Trough-to-Trough value increase +35-70%
• Peaks occurred at different points in cycle
• Public / Private values not always correlated
Note: SLB stock price used for OSX proxy prior to March 97.
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History Indicates Bottom May Be Near• Past bottoms formed after 6 months of rationalization
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Key E&P Challenges This Year
• Low commodity prices = uneconomic projects• Live within internal cash flow (up to 75% less)
– Banks cautious about new lending, for now– Equity availability limited
• Pressure to reduce balance sheet leverage• Questions to consider
– What projects do we pursue?– When will demand and prices rebound?– How do we plan for the future?
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Where is Oil’s New Price Level?
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What Will Establish the Gas Price?
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Volatility is the Only Certainty
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Looking to the Future
Focus on Long-Term Value Creation
Accumulate low-risk producing assets
Build portfolio of future growth opportunities
Prudently use leverage (leverage kills)
Create sustainable corporate entity
BackTo
Basics
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Looking to the Future
Minimize Operating Costs
Diligently pursue cost reductions in all areas
Ensure short-term viability Retain long-term upside
Position company for future margin expansion
Valuation multiplier benefits
BackTo
Basics
Focus on Long-Term
Value Creation
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Impact of Pricing, Fixed Costs• Small price moves enormously impact cash flow
2008 2009
Gas
Price
$ 9 33% Decline
PUD 2P & In Gas Price
$ 8 Cash 3P Provides
Flow CF Total ~65% Decline
$ 7 Proved Cash Flow In Cash Flow Gas
Producing Price
$ 6 Cash $ 6
Flow All Proved
$ 5 Costs Producing $ 5
Cash Flow
$ 4 Capital $ 4
and Total Capital and
$ 3 Operating Operating Costs $ 3
Operating Costs
$ 2 Costs Operating $ 2
Costs
$ 1 $ 1
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Looking to the Future
Adjust to Higher Capital Costs
Private equity targeting 25%+ return opportunities
Mezzanine funds availability shrinkingcapital cost rising
Fewer bank credit options higher spreadstighter terms
Maximize available capital
BackTo
Basics
Focus on Long-Term
Value Creation
MinimizeOperating
Costs
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Looking to the Future
Eliminate Downside Risk
Entering a new risk-reward paradigm
Avoid high risk activities exploration blanket leasing
Use conservative financial structures, hedging
BackTo
Basics
Focus on Long-Term
Value Creation
MinimizeOperating
Costs
Adjust toHigherCapital Costs
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Our Keys to Success
BackTo
Basics
Focus on Long-Term
Value Creation
MinimizeOperating
Costs
Adjust to HigherCapital Costs
EliminateDownside
Risk
We may be returning to conditions similar to those experienced in the 1990’s
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www.essfunds.com