1 F R I E D M A N B I L L I N G S R A M S E Y ENERGY & NATURAL RESOURCES INVESTMENT BANKING IPAA’s...

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F R I E D M A N B I L L I N G S R A M S E Y


ENERGY & NATURAL RESOURCES INVESTMENT BANKING

IPAA’s 12th AnnualPrivate Capital Conference

144(a) Private Placement vs. Traditional IPO

George HutchinsonManaging Director

[email protected](713) 343-1005

http://www.fbr.com

January 19, 2006


“The More Things Change, The More They Are The Same” -Alphonse Karr

(a) Source: Baker Hughes on January 13, 2006(b) Source: NYMEX December 2010 closing price on January 12, 2006(c) Source: CommScan EquiDesk

• Energy 2006 - Be Alert for “Paradigm Shifts…”

• The Cycle Exists

– Supply and demand dynamics have changed

– 1,467 (a) rigs flood US market with supply as prices continue to climb

– Natural gas and crude oil above $9/Mcf (b) and $61/Bbl (b) through 2010

– Does the other shoe drop?

• Record Level of Energy Equity Capital Markets Transaction

– $17 billion (c) of equity raised in 2005 vs. $5 billion (c) a year in the ’90’s


• 1980’s and 1990’s – Own the Asset Not the Equity

– Lower price environment produces modest cash returns per Mcfe

– E&P companies consistently reported losses (cash flow positive)

– Perception: E&P equities not expected to outperform S&P 500

– Own oil & gas assets over equities or be a mezzanine investor

– Institutions underweight E&P equities

• 2005 – Energy Equities are Attractive – Outperforming S&P 500

– Robust prices allow companies to report strong earnings and cash flow

– Reinvestment of cash is a differentiator

– Winning strategies:

• Large low complexity repeatable development plays and acreage

• Demonstrated track record of value creation

– Institutions market to overweight in energy

Common Investment “Wisdom” Changes (again) A Paradigm Shift?


Were We Really That Bad? – Are We Really This Good?

Source: John S. Herold M&A Database and CommScan EquiDesk

Era of the "Management"

Era of the "Assets"

Average Reserve Value ($ / Mcfe) Value of Equity Offerings

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Oil

& G

as

Eq

uit

y O

ffe

rin

gs

($B

)

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

In-G

rou

nd

Re

serv

e V

alu

e (

$ / M

cfe

)


Differing Investor Objectives

Private Equity 144(a) Investors Public

Hold Period 3 – 4 yrs under 1 year immediate

# Investors 1 – 5 100 – 300+ 1000+

# Institutional Investors 1 – 5 200+ 500+

Directors Majority Minority Minimal

Return Goal 25%+ 20%+ 15%+

Note: Statistics above are estimates and may not reflect actual results.


What is a 144(a)

(a) Source: CommScan and EquiDesk

• Private placement (exemption created in 1990)

• Over $9 trillion (a) raised in convertible market

• Over $215 trillion (a) raised in debt market

• Beginning to see use in equity

• Raise capital first

• Subsequently file with SEC

• Private shareholders achieve full liquidity upon listing

• FBR 29/29 – The rest of Wall Street 14/21


144(a) Private Placement vs. Traditional IPO Process

Month 144(a) Private Placement Traditional IPO

1 Negotiate, Structure, Due Diligence Negotiate, Structure, Due Diligence

2Draft Placement Memorandum

Market TransactionDraft Placement Memorandum

3 Close Transaction

4

5

6Market TransactionClose Transaction

72nd "IPO" Shares Registered

Close 2nd Transaction

File S-1 With SECRespond To Comments

File S-1 With SECRespond To Comments


144(a) Equity Offering – Key Benefits / Features

• 144(a) enables capital to be raised in seven to nine weeks

– SEC documents filed after capital raised

– Limits event risk in fickle equity markets

• Provides “safe haven” period for SOX

– Flexibility regarding audit and other issues prior to share registration

• If done right - same broad investor group as IPO

– No one buyer has pricing power

– Approximately 200+ institutional investors

• Sold to sophisticated investors

– Institutions with more than $100 million of assets (“QUIBS”) and accredited investors

– Transactions primarily sold to QUIBS

– If executed well, deals can be priced without material discount to IPO valuation

• Limited liquidity until shares registered, can be traded on “4th market”


Private E&P Companies Seem to Favor the 144(a) Process

2005 E&P Equity Transactions

$2.4

$0.4

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

144(a) Private Placement Traditional IPO

US

$ in

Bill

ion

s

• Private E&P companies have two primary options to consider when accessing the public equity markets: a 144(a) and an IPO

• In 2005, private E&P companies raised $6 out of every $7 dollars vis-à-vis a 144(a) vs. a traditional IPO

Note: 144(a) Transactions does not include private investments in public entities (PIPE’s).Source: CommScan and EquiDesk


Notable 144(a) and Private Offerings

Bold denote FBR managed transaction. All FBR managed 144(a) transactions are sole managed.

• Notable E&P 144(a) Offerings:

– Quest Resources - $198 million

– Riata Energy - $244 million

– CNX Gas Corporation - $447 million

– Stroud Energy - $172 million

– Rosetta Resources Inc. - $800 million

– Whittier Energy - $51 million

– Mariner Energy - $440 million

– Petrohawk Energy Corporation - $200 million

– Consol Energy - $1,309 million

• Other Notable Energy 144(a) Offerings:

– Aventine Renewable Energy - $275 million

– Energy Coal Resources - $96 million


What FBR’s Investors Seek in a 144(a) Investment?

• Transformational investment opportunities

– Consol – CNX – Petrohawk – Mariner – Rosetta – Aventine

• Excellence in a niche

• Talented management with demonstrated track records

• Scalable investment opportunity

• Reasonable floor on risk

• Near-term liquidity


So Where’s the Rub?

Pros Cons

• Speed of execution • Valuation if not done right

• Safe harbor prior to registration • No immediate access to retail investors

• Period of time to “refine” story • Need for transformational thesis

• Broad institutional exposure • Must deliver on promised results

• Grand opening IPO


Threshold Issue: What’s the Issuance Discount?

Other 144(a) Equity Offering ProcessesFBR’s 144(a) Equity Offering Process

Ind

ivid

ua

l In

ve

sto

r’s

% o

f O

ffe

rin

g

• “Normal” IPO issuance discount is approximately 5% - 10%

• Issuance discount on a 144(a) is a function of the breadth/narrowness of distribution

– The broader the institutional shareholder base, the lower the discount

– Traditional IPO distribution process not well suited for a 144(a) offering

20%

10%

5%

15%

FBR Targeted Cap of 10%

200+ 50 50 200+

Number of Institutional Investors in 144(a) Offering

Note: Bell curves and statistics represented in graph above are estimates. Actual results may vary.


Proven Energy Investment Banking Track RecordLeading Equity Capital Market Execution

$176,000,000March 10, 2005

FOLLOW-ON OFFERINGCo-Manager


$256,200,000August 9, 2005

$96,485,000May 26, 2005

FOLLOW-ON OFFERINGBook-Running Manager

$175,500,000May 5, 2005

INITIAL PUBLIC OFFERINGCo-Manager

144a PRIVATE PLACEMENTSole Placement Agent

$800,000,000July 7, 2005


$275,327,000December 12, 2005

PRIVATE PLACEMENTSole Placement Agent

$446,987,000August 1, 2005


$1,308,500,000September 23, 2003

October 9, 2003February 19, 2004

$149,000,000June 9, 2004



$92,575,000October 28, 2005

$599,696,000September 15, 2005


INITIAL PUBLIC OFFERINGCo-Manager

$99,705,000August 16, 2005

$440,335,000March 3, 2005


$200,000,000November 16, 2004



$198,356,000November 14, 2005

$113,942,000June 8, 2005



$51,175,000June 14, 2005

$261,000,000November 10, 2004

INITIAL PUBLIC OFFERINGCo-Lead Manager

$96,205,000November 23, 2005


$800,000,000August 04, 2004

KKR Financial



FBR Energy & Natural Resources Group RankingsThe Leading Energy Equity Underwriter

Source: CommScan EquiDesk Data & Software.Bookrunner volume tables (including over allotment) - domestic IPOs, follow-on’s, private placements excluding closed end funds and best efforts;

*Natural Resources (consists of the following sectors: Oil & Gas, Mining, Energy)Market value less than $5 billion.

League Table as Submitted

Book Running Manager Amt. Raised1 Friedman Billings Ramsey & Co 2,038.92 Citigroup 1,661.53 JP Morgan 1,273.34 Morgan Stanley 1,238.35 UBS 551.66 Jefferies & Co Inc 524.27 Lehman Brothers 409.28 Credit Suisse First Boston 405.89 Raymond James 396.4

10 RBC Capital Markets 351.6

#1 Natural Resources Underwriter for Issuers Valued Under $5B1/1/2005 - 12/31/2005


Appendix: Overview of FBR Process for 144(a)


Overview of FBR Process for 144(a) – Weeks 1 & 2

Description

• Conduct organizational meeting to coordinate schedule over next 2 months

• Begin financial, operational and legal due diligence (contracts, audited financial statements, internal budget, 3rd party review of company’s reserves)

• Provide company with thorough due diligence request list

• Build investment banking model of company’s profitability over next five years

• FBR Commitment Committee – Prepare committee memorandum (typically 15-30 pages and 2-3 hour all hands meeting including FBR’s CEO) for permission to send engagement letter

• Circulate first draft of road show presentation

• Circulate first draft of offering memorandum

• Hire outside engineering consultant and other consultants

• Field trip with consultants

• Informal discussion with senior (bank) lenders, bridge lenders and term loan B investors

• Launch background checks and references


Overview of FBR Process for 144(a) – Weeks 3 & 4

Description

• Continue financial, operational and legal due diligence

• Finish road show presentation

• Finalize company projections

• FBR equity research analyst visit with management

• Draft and finalize offering memorandum

• FBR Commitment Committee – permission to print offering memorandum


Overview of FBR Process for 144(a) – Weeks 5 – 7

Description

• Continue financial, operational and legal due diligence

• Practice presentations with senior members of FBR’s energy group

• Test management presentation against road show and amend as needed

• Kickoff road show at FBR headquarters with 4-5 teach-in presentations to entire FBR sales force from company management, investment banking lead Managing Director, FBR equity research analyst, FBR’s institutional sales head and follow up teach-in

• Net road show uploaded for online viewing – passwords changed regularly

• 3 week road show – management in front of 150+ investors

• Lead bankers prepare accounts (30-45 min per account) before most of company management’s one-on-one meeting

• Price equity offering at end of road show

• Close and fund transaction the following week


Overview of FBR Process for 144(a) – Post Closing

Description

• Limited trading for investors on the PORTAL Market ®, which is operated by The Nasdaq Stock Market, Inc.

• Company commits to file registration statement or S-1 with the SEC before predetermined date – typically 90 days after closing of 144(a) transaction

• Receive SEC review, comment and response period

• Grand opening IPO – print final offering memorandum and conduct road show

• Company or selling shareholders receive net proceeds from offering

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