COGA/IPAA Private Equity ConferenceAugust 10, 2006

Laramie Energy

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Introduction to Laramie Energy

• Denver-based independent E&P company formed by former executives of Forest Oil Corporation and Mesa-Hydrocarbons, Inc.

• Proven operating team specializing in working within in the technical, regulatory, environmental, and terrain challenges of the Rockies

• Excellent reputation with the BLM, U.S. Forest Service, Colorado Oil & Gas Commission, Western Slope county officials, and regional service companies/vendors

• Funded by an initial $150 million private equity capital commitment from EnCap Investments and Credit Suisse/Avista which was recently increased to $215 million; bank financing from JPMorgan Chase Bank, BNP Paribas, and Wells Fargo

• Drill bit growth strategy focused on unconventional natural gas resource plays in the Rockies:– Primary emphasis on tight-sand plays able to be developed on a large scale over

contiguous township sections– Operations are concentrated in the Piceance Basin– Currently executing a large scale development drilling and infrastructure build-out program

on the Company’s 50,000+ acres– Capital budget for 2006 of $150 million. Currently operating 5 rig drilling program.

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Laramie Energy’s Operating Strategy

• Manage the Company as a project with a fixed life-cycle and clear investment objectives. • Maintain operatorship and high working interests in all projects.• Closely manage the Company’s gas marketing, hedging, and transportation programs.• Maintain financial discipline and a strong capital structure.• Employ a highly qualified, experienced team with substantial “hands on experience” in resource play developments

and operations: – Resource plays requires a different corporate mindset and operating focus than conventional E&P

companies– Development is built around large scale drilling programs that repeat common operations in an

assembly-line fashion and capture economies of scale to drive down costs – Engineering project management, acreage inventory, and drilling and completion expertise are key

value drivers, not wildcat geologic prospecting• Provide key employees with a material opportunity to participate in the value created by achieving the Company’s

mission.• Closely control operating and overhead expenses:

– Outsource all non-core activities – Utilize consultants for part-time needs

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Laramie Energy’s Piceance Basin Operations

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Operations in Piceance Basin, Colorado

Laramie Energy’s primary operating areas

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Fields Currently Under Development

Location – Piceance Basin

OperatingOperatingAreasAreas

Hell’s Gulch Prospect

East Plateau Field

Brush Creek Field

Logan’s Trail

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June 1, 2004

June, 2006 Est.

Gross Acres 20,175 55,000

New Producing Wells 60 Success Rate 98%

Gross Daily Production (MMcfe/d)(Incremental 15 MMcfe/d awaiting pipeline completion)

1.4 18.5

Risked Potential Locations 350 1500+

Net Proved Reserves (Bcfe) 18.0 400+ % Operated 100% 100%

Capital Employed to Date ($MM) $20 $125

Operating and Investment Achievements to Date

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One Operating Company’s Perspective

Private Equity Capital

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Private Equity Market Conditions

• Significant capital is available• Private equity provides investors and management with the ability to capture attractive

opportunities that don’t fit public company short term valuation drivers But…

– Commodity price expectations drive private capital availability and mindset on invest/hold/sale decisions

– Time for monetization/liquidity event is important

– Private equity is patient during the valuation phase but generally need to monetize within five to seven years

– Business plans based upon pure acquisition strategies are more difficult when prices and competition are high resulting in lower returns

– Investor familiarity with the industry and its cycles are important to a successful relationship with management and a successful venture

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Capital Access Considerations

PUBLIC• Startup capital is generally not available• Size and timing are important to an IPO• Capital access and alternatives are greater with public

company–Equity–Bank Financing–Debt–Hybrids

• Reporting is more complicated and time consuming–Public filings–Legal and accounting scrutiny–Transaction fees–Regulatory compliance–Marketing timing is important

PRIVATE• Startup capital is available

–Sound business plan–Good track record–Due Diligence

• Capital sized to business plan• Structure is simple

–Equity–Bank Financing

• Reporting is simple–Monthly reporting–Quarterly Board meetings–Capital called as needed–Investors want capital employed–Additional capital available if performance is good and opportunity attractive–Investors often take contrarian view to general market

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Key Structuring Considerations

• Company structure

– Pass-through entity vs. corporate entity

Tax implications

Impact on exit strategy

• Capital structure

– Preferred, common or combination

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Process is Key to Obtaining Best Structure and Terms

• Market Exploration is critical to maximizing value to management• Structure and terms are function of the type of investment relative to risk and

potential reward• To use an advisor or not?

– Depends on an advisor’s expertise and relationships

– Ability and willingness to spend necessary time

– Experience in “negotiated” transactions

– Provides buffer between management and sponsors

– Management’s willingness to take advice

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Key Management Considerations

• Founding management investment– How much “skin in the game”?

• Friends and family– How many and how much?

• Management promote – Hurdle rates and splits

Structure (single vs. staggered) % levels (low hurdles and high splits)

• Base salaries and bonuses

• Additional equity for current and future bench employees

• Management participation levels among the group generally change in future ventures as employees’ ability to put more skin in the game increases

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Governance and Control Considerations

• Equity sponsors– Partnership mentality– Number of sponsors

Investment style and compatibility– Conflicts (Investments Similar in Nature and In the Same Area)

• Governance – Number of independent board members– Control

Management vs. board level decisions Board approval vs. sponsor committee approval

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Public vs. Private Company Considerations

• Public company

+ Increased access to capital markets

+ Liquidity of investment

+ Currency for acquisitions

+/- Public market valuation benchmark

– Heightened level of scrutiny and regulation

– Managing the Street expectations / reactions

• Private company+ Typically more upside for

management

+ Less filing / registration / compliance requirements

+/- Exit in ~ 5 years via sale or IPO

+/- No public market valuation

– No acquisition currency

– Limited access to capital

– Illiquidity of investment

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COMPENSATION

PUBLIC• Salary usually determined by survey done for board

compensation committee and is a function of the size of the company

• Bonus plan is usually formalized and is approved/negotiated with the compensation committee

• Long term incentives are either stock options or restricted stock

–Awards usually based upon survey done for compensation committee by a third party–Taxed at ordinary income tax rates

• CEO & CFO have to certify financial statements to broad market with risk of civil and potentially criminal penalties under Sarbanes-Oxley.

PRIVATE• Salary is usually market for equivalent position and

based upon general knowledge, not a survey• Bonus plan is formalized and is approved/negotiated

with compensation committee of investors• Long term incentives are original investment in

company usually at a discount to investors and a participation in the value created that is a function of return

–Company is usually structured as a partnership or LLC which allows for tax deductions from drilling to be passed through–Upon exit the investment is eligible for taxation at long term capital gains rates

• CEO & CFO effectively certify financial statements to the investors and that no events of default have occurred (under Company formation/governance agreements) at each capital call

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Governance

PUBLIC• Board of Directors elected by shareholders

–Large board required to meet independence tests and to fill required board committees

–Knowledge of business and qualifications are not required

–Fees to attract good board members are high because of liabilities associated with serving

–Mindset of directors is that of a protectorate as opposed to an advocate

–Time required to manage public board and the various committees required is large

PRIVATE• Board appointed by investors and

management

–All members have knowledge of business and the primary common goal to create value for the business

–No board fees are paid

–Meetings are held quarterly or on an ad hoc basis when required

–Audited financials and audited reserves

–Small number of committeesCompensation

–Time commitment is small

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Business Focus

PUBLIC• Significant time is dedicated to managing

processes associated with being a public entity:–Public reporting and compliance with stock exchange and SEC regulations–Investor relations

Full DisclosureAnalystsShareholders

–Business planning tends to concentrate on meeting market expectations as opposed to efficiency and execution–Current public markets are dominated by hedge funds and momentum investors which have short term investment interest

Creates focus on visible top line growth as opposed to longer term investment return objectives

PRIVATE• Able to dedicate more time toward operational

and technical issues which impact the performance of the company

• Less time and money spent on legal and accounting issues.

• Investor reporting, while comprehensive, becomes somewhat standardized and automated.

• Capital budgets are revised and approved quarterly or when needed on an ad hoc basis.

• Business is managed with the end in mind (i.e. exiting through a sale or IPO).

• Able to make decisions quickly without cumbersome approval process.

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Which is Best?

Depends upon circumstances and objectives.

Public• Perpetuates the enterprise

• Provides liquidity over time

• Provides broad array of capital alternatives to fund growth

• Creates a public profile

• Allows greater management autonomy / less direct investor oversight

Private• Provides startup capital

• Exit can be through sale or IPO; Investors control decision

• Perpetuation may be achieved through another startup

• Can operate without high public profile

• Allows greater management focus on business; less on short-term market expectations or quarter-to-quarter growth