Annapolis believes that the oil & gas sector is capable of generating above average returns in the medium to long term. Annapolis targets investments in start-up and early stage private exploration & production companies. Within the broader context of oil and gas equities, Annapolis believes that stronger returns can be found within the private company sector, where some of the best and most cost effective teams in the industry choose to operate. Many highly expertised teams prefer to avoid the distractions that are associated with the public markets and prefer to remain private where they can focus on maximizing long-term value. Accordingly, Annapolis sees opportunity in this more exclusive private market where a major pool of talent resides, where access to capital is restricted, and where private venture funds, like Annapolis, are the preferred source of funding.

Investment Criteria

Annapolis is a value player that is focused primarily on multiple of return. As a general rule, an investment opportunity will be considered only where there exists visibility to a 3X multiple of return. Operating within the private company sector and with a three to five year investment horizon, Annapolis seeks to invest with management teams that focus on finding and developing oil and gas reserves at the lowest possible cost. Although it cautions against liquidations in a “down” market, Annapolis places less emphasis in its investment strategy on commodity price and equity market cycles, choosing instead to place increased importance on a management team's ability to add fundamental value over the mid to long term.

More specifically, the key ingredients Annapolis looks for in investment opportunities are:

• exceptional management teams – includes technical expertise in specific commodity and play types, coverage of all critical disciplines (such as geology, engineering, accounting and land) and ethically sound business practices
• shareholder and management alignment – examples include material equity commitments by management, compensation tied to performance, and shared views on exit strategies
• access to growth opportunities
• well defined business plans
• sound corporate governance

To date, Annapolis has made two kinds of investments. Our large “principal” investments range between $5 million and $21 million and generally are monitored through board representation. For instance, we have two board nominees in Caltex Energy and one board nominee in HighRock Energy, where Annapolis II has investments of $21 million and $7.5 million, respectively. Our smaller “portfolio” investments range between $1 million and $5 million, in respect of which we play a monitoring role but generally do not take an active involvement at the board level.

Deal Flow

Annapolis proactively originates investment opportunities using its relationships and other competitive advantages to access opportunities not available to others. Annapolis has to date accessed the majority of its investment opportunities through its relationships with private company management teams and other funds that invest in private companies. Annapolis has in some cases been approached by management teams that have had Annapolis recommended to them as an equity partner of choice. Finally, Annapolis is also approached by investment dealers that act as agent for private company equity offerings. Annapolis believes that its extensive private oil & gas management experience is attractive to many start-up management teams, making Annapolis a preferred equity partner.

To date, Annapolis has been exposed to a wide variety of investment opportunities. There exists Calgary based private equity funds that prefer to not make single investments of more than $1 million to $2 million while there exist others that prefer to not make single investments of less than $10 million. As Annapolis invests at both ends of the spectrum (e.g. our smallest investment is $1.3 million while our largest investment is $21.0 million), it believes that it is invited to see and can actively consider a wider variety of investment opportunities than other private equity funds. Annapolis will also on occasion take the initiative to work with a management team (and its agent, where applicable) to structure or restructure the terms of a financing. This has in the past allowed Annapolis to secure a more favourably termed financing.