The Convergence of Commodities and Capital MarketsGeorge Manahilov, Barclays Capital Commodities: The Convergence of Commodities and Capital Markets George Manahilov, Barclays Capital Commodities January 18, 2007


The Big Picture: Commodity markets vs. capital raising: Market Fundamentals: Growth Global growth prospects are looking strong Increase in demand for commodities China Volatility Commodities are the most volatile asset class Cyclicality Geopolitical tensions Infrastructure scarcity No “Bubble” Implications on Capital Raising: New investors Private equity – driving force New investors – pension funds, institutional Commodity as an asset class Evolution of commodity markets Complexity Volatility Liquidity Execution risk Financing and credit – a direct link to commodity hedging The Big Picture: Commodity markets vs. capital raising


Investing in Commodities as an “Asset Class”?: Investing in Commodities as an “Asset Class”?


Commodities: the new “Asset Class”: Commodities: the new “Asset Class” Asian demand China is currently the biggest user of coal, iron ore, steel, copper, nickel and aluminum Current Environment: New Asset Class


Capital demands to alleviate the scarcity are enormous: Source: IEA 2003 World Energy Investment Outlook IEA estimate until 2030 is US$16.5trn, equivalent to 1% of global GDP or 4.5% of global investment for the next 25 years at least …. and we believe this is far too conservative Capital demands to alleviate the scarcity are enormous


Supply constraints: there is not a huge excess of oil in storage: Supply constraints: there is not a huge excess of oil in storage Global oil supply and demand Non–OPEC supply well below forecast Global inventory change and oil prices Source: Barclays Capital Research, ICE


China: commodity demand is getting stronger: China: commodity demand is getting stronger China oil demand growth has improved in 2006 (Y/Y Change) Chinese oil demand relative to others (mb/d) Source: Barclays Capital Research Thousand b/d


Ultimately, investors search for diversification: Ultimately, investors search for diversification Investors are looking more and more towards increasing investment in commodities in periods of persistently high energy inflation US equity market sector weighting for oil and gas, % total market 1973-05 UK equity market, industry sector performance, geometric annual return versus market return, 1970-80 Source: Barclays Capital Research


and the flows will continue: institutional investors are underinvested in commodities: Total assets held by institutional investors are around $US50 trillion globally. Direct commodity investments at just $US120 billion represents less than one quarter of one percent of this global portfolio. Commodity investments are one tenth the amount invested in hedge funds and around one quarter the market cap of Exxon-Mobil. and the flows will continue: institutional investors are underinvested in commodities Source: Barclays Capital Research


Institutional investors are a major force in Commodities: Institutional investors are a major force in Commodities Net speculative futures position and price in NYMEX WTI crude oil Hedge fund activity in commodity markets is still growing, both long and short Source: Barclays Capital Research


…and investor-focused commodity-linked issuances are exploding: …and investor-focused commodity-linked issuances are exploding USD Value of Commodity-linked MTN Issuances ($mm) Source: www.mtn-i.com


The “Ask” from Commodity Dealers – a New Paradigm: The “Ask” from Commodity Dealers – a New Paradigm


The evolution of commodity markets: The evolution of commodity traded markets has accelerated the development of commodity-linked financial structures Commodity dealers have become the predominant source of market liquidity Banks’ balance sheet extension and commodity structuring capabilities have supplanted industry participants such as oil companies and utilities in large structured transactions The evolution of commodity markets


Integration of financing & commodity markets: Old World New World Financing Capability Commodity Hedging Commodity Credit Extension Financing Capability Commodity Hedging Commodity Credit Extension Integration of financing & commodity markets


Commodity Hedging: ability to deliver the commodity market expertise: Select Markets in which Barclays trades: Crude & Products: Crude • Fuel Oil • Heating Oil • Gasoline • Diesel/Gas Oil • Jet Fuel/Kerosene • Naptha NGLs : MontBelvieu (TET & Non-TET) • Propane • Butane • Iso-Butane • Ethane • Natural Gasoline US Natural Gas: NYMEX • US Basis • AECO • Canadian Basis US Power: ISO-NE • PJM • NYISO • ERCOT • MISO • Mid C • PV • Mead • Four Corners • SP-15 • NP-15 • COB Petchems: Benzene • Ethylene • Styrene European Power: UK • France • Germany • Netherlands • Belgium • Spain • Nordic Region European Natural Gas: UK • Zeebrugge Coal & Dry Freight: API2 • API4 • Baltic Exchange Routes • Baltic Exchange Time Charters • NYMEX • PRB Emissions: EU ETS • CERs Base Metals: Copper • Aluminum • Nickel • Zinc • Tin • Lead • Aluminum Alloy Precious Metals: Gold • Silver • Platinum Group Metals Other: European Weather Derivatives Commodity Indices Including: Energy • Metals • Agricultural • Softs • Livestock Commodity Hedging: ability to deliver the commodity market expertise Barclays Capital Commodities operates globally across a broad range of asset classes


Commodity Hedging: Barclays North American gas coverage: Commodity Hedging: Barclays North American gas coverage


Financing Capability: Barclays Capital offers full suite of products: Financing Capability: Barclays Capital offers full suite of products Borrowing Base Revolving Credit Very active bank market has put pressure on covenants Ability to bridge gap between bank price decks and forward curve by aggressive hedging Volumetric Production Payments Second Lien Leveraged Loans High Yield Debt Mezzanine Loans Old technology which keeps evolving – can be principalled or broadly distributed to deliver aggressive pricing; structural features to include non-PDP reserves Can be structured as both a monetization tool or in acquisition context Explosive growth from 2006 continues Broad distribution platform required to deliver optimal execution Less flexible than leveraged loans, but can be more aggressively priced than leveraged loans Broad interest towards oil and gas – Chesapeake did first deal in Europe Can be principalled or distributed to deliver aggressive pricing Can be tailored to client needs


Case Study: LBO financing: Case Study: LBO financing Private equity client was looking to raise capital to finance an oil and gas acquisition from a privately held seller Barclays structured a package that included senior secured 1st lien/2nd lien structure for approximately 70% of the purchase price Structure included a 5-year hedge for approximately 75-80% of the PDP production from the properties that covered: Natural gas at the respective basis locations Natural gas liquids Crude oil Barclays was able to leverage its structuring and distribution expertise and offer various financing alternatives as well as very aggressive commodity hedge execution Commitment of Capital Speed of Execution Underwriter co-ordination Covenant flexibility as related to prepayment, capital spending and future acquisitions Flexibility on amendments and modifications Aggressive commodity execution Barclays Delivery to Client – the Pressure Points Transaction Overview Optimizing the financing economics – what matters?


Commodity credit extension: Step 1: Monte Carlo Simulations are run on MTM Exposure Step 2: Take positive MTM exposures and multiply by probabilities to generate credit exposure Positive MTM Exposures (negative are ignored) Probability of each exposure (1/1000 in this case) Credit Exposure Asset Value Correlated with Price Moves Hedge Settlement Temporary Shortfall Due to Operational Issues Tail Risk Pari passu 1st / 2nd Lien Equity Risk Allocation Capital Structure The challenging part: how to fit commodity credit into capital structure Commodity volatility – a direct corollary to credit exposure? Commodity credit extension


Case Study: asset-linked hedge trading line: Client was looking for a dedicated trading line which would allow for hedging significant volumes of its production at opportune market prices; liquidity from bank group under its revolver was insufficient Barclays structured a bilateral hedge trading line secured by mortgages over identified unencumbered proved reserves Client required to maintain certain reserve and production coverage ratios of forecasted production to production hedged The trading line specifies acceptable parameters for commodity transactions in respect of tenor and volume relative to production forecasts Trading line was structured to exploit the “right-way risk” nature of commodity assets, thereby maximizing the client’s liquidity through eliminating the need for posting collateral Case Study: asset-linked hedge trading line Value (USD) Peak Credit Exposure Asset Value Dedicated extension of credit capacity that is multiples of the size of the revolver capacity Hedging flexibility within the parameters of the trading line – NYMEX, basis, oil and gas Solved the inherent mismatch between asset values and credit exposure Trading line can be converted into a funded VPP at fair market value in the future Transaction Overview Barclays Delivery to Client – the Pressure Points The mismatch – asset value vs. credit?


Other select structured transactions: Other select structured transactions In 2005 Duke Energy announced it signed an agreement to transfer substantially all of Duke Energy North America's (DENA) portfolio of derivatives contracts to Barclays Capital Transaction was structured to facilitate the sale of generation plants to LS Power in January of 2006 and Duke’s rapid wind-down of the DENA operation In 2005 Pioneer Natural Resources announced the sale of a volumetric production payment in oil and gas assets located within the Spraberry field in Texas to an affiliate of Barclays Bank PLC for $300 million The VPP interest is to approximately 7.3 MMboe, consisting of 6.3 MMbbls of crude oil and 6.0 Bcf of natural gas based on a monthly schedule through December 2010 Barclays structured and underwrote the financing for the VPP transaction and acted as sole hedge provider In 2005 Carlyle/Riverstone purchased Petroplus International N.V.; Petroplus owns refineries in Belgium, Switzerland and the UK with maximum capacity of approximately 240,000 barrels a day The purchase price of €475 million was financed with a €320 million senior bridge debt package underwritten by Barclays Capital; Barclays also provided a crack spread hedge on a significant portion of the refinery output Client wished to monetize the value of long-lived reserves and re-invest proceeds in drilling Barclays’ structure involved the conveyance of a net profits interest in identified oil and gas fields funded by the issuance of senior notes and equity Client was able to lock in the economics of the transaction via a long-term hedge without consuming corporate liquidity through posting collateral Large Utility owner of oil & gas reserves $300,402,967 Volumetric Production Payment Sole Arranger European Utility Barclays’ client had physical LNG contracts which contained embedded optionality related to delivering LNG into various points around the world; contracts were linked to both Dated Brent and Henry Hub Barclays’ structured option hedge allowed the client to capture the optionality in its contract In 2006 Barclays structured and underwrote $335 million of senior secured facilities to finance the upgrades and expansion of two high-deliverability multi-cycle underground natural gas storage facilities in Texas Barclays also structured hedges to support the financing


Appendix: Barclays Capital Overview: Appendix: Barclays Capital Overview


Global Debt Financing Platform: "In an industry with increasingly high barriers to entry, precious few firms have the courage and confidence to challenge the incumbent investment banking oligopoly on its own terms. One firm did just that in 2004, forcing its way towards the top of its chosen businesses and aggressively pushing its own agenda, with stunning results. Barclays Capital is IFR's 2004 Bank of the Year.“ IFR, Dec 2004 Recognition by the market and our customers includes 2005 rankings Global All Debt, 4th (up from #10 in 2000); Europe All Debt – 2nd (up from #8 in 1999); Sterling Bonds -1st (past five years running); Global Loans -4th; Euro Bonds – 4th; US Investment Grade – 5th; European Loan House of the Year – IFR December, 2004; Sterling Bond House of the Year – IFR, December 2004; Asia-Pacific Bond House of the Year – The Banker, 2005; Best Euro Commercial Paper House- Treasury Management Int’l, 2005. 2004 2005 2000 2001 2002 2003 Source: Dealogic Bondware, Loanware, MTNWare and Euromoney 2004 IFR Bank of the Year European Investment Bank of the Year Bob Diamond – European Banker of the Year (2nd year running) Global Debt Financing Platform


Global Commodities Platform: Industrial Materials Base Metals Precious Metals Plastics Other Speciality Markets Environmental products Agricultural products Softs Weather Freight Energy Crude Oil Refined Products U.S. Power & Gas Eur Power & Gas Coal Investor Products Index Swaps Commodity Notes Funds Global Commodities Platform


Wide Network of Clients: Barclays Commodities deals with over 1,000 clients in a wide range of sectors Our broad network of client relationships, with natural offsets between industries, allows Barclays to provide all clients with the most aggressive transaction economics Commercial Banks Pension Funds Oil & Gas Mining Coal Producers Freight Companies Brokers Commodity Dealers Central Banks Private Banks Airlines Power Generators Oil Refiners Local Government Manufacturing Industrials Insurance Utilities Railroads Beverage Companies Fund Managers Hedge Funds Telecoms Retail Transport Jewellery Manufacturers Metal Refiners Travel Automobile Companies Sovereigns Wide Network of Clients


Proven Track Record and Wide Recognition: Barclays Capital Commodities has received a lot of external recognition for its depth of product capabilities SL039 Proven Track Record and Wide Recognition


Disclaimer: This presentation has been prepared by Barclays Capital - the investment banking division of Barclays Bank PLC (“Barclays Capital”, together with its affiliates worldwide, “Barclays”). This presentation is for discussion purposes only, and shall not constitute any offer to sell or the solicitation of any offer to buy any security, provide any underwriting commitment, or make any offer of financing on the part of Barclays, nor is it intended to give rise to any legal relationship between Barclays and you or any other person, nor is it a recommendation to buy any securities or enter into any transaction or financing. Investors must consult their own legal, tax, accounting and other advisers prior to making a determination as to whether to invest in any securities or enter into any transaction of financing to which this presentation relates. Any pricing in this presentation is indicative. Although the statements of fact in this presentation have been obtained from and are based upon sources that Barclays Capital believe to be reliable, Barclays Capital does not guarantee their accuracy or completeness. All opinions and estimates included in this presentation constitute the Barclays Capital’s judgement as of the date of this presentation and are subject to change without notice. Any modelling or back testing data contained in this presentation is not intended to be a statement as to future performance. Past performance is no guarantee of future returns. No representation is made by Barclays Capital as to the reasonableness of the assumptions made within or the accuracy or completeness of any models contained herein. Neither Barclays, nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential losses arising from any use of this presentation or the information contained herein, or out of the use of or reliance on any information or data set out herein. Barclays and its respective officers, directors, partners and employees, including persons involved in the preparation or issuance of this presentation, may from time to time act as manager, co-manager or underwriter of a public offering or otherwise deal in, hold or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to any securities or related derivatives which are identical or similar to those to which this presentation relates. This presentation is being made available on a confidential basis in the United Kingdom to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2001. Outside of the United Kingdom, it is directed at persons who have professional experience in matters relating to investments. Any investments to which this presentation relates are available only to such persons and will be entered into only with such persons. Barclays Capital, the investment banking division of Barclays Bank PLC, is authorised and regulated by the United Kingdom Financial Services Authority and is member of the London Stock Exchange. Copyright in this presentation is owned by Barclays Capital (© Barclays Bank PLC, 2006). No part of this presentation may be reproduced in any manner without the prior written permission of Barclays Capital. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Disclaimer