tcw energy group tcw asset management company moga capital markets update patrick hickey senior vice...

TCW Energy Group

TCW Asset Management Company

MOGA Capital Markets Update

Patrick HickeySenior Vice PresidentMay 2006

2

TCW Energy Group

Table of Contents

• Market Perspectives

• Mezzanine Market Overview

• TCW Overview

• Conclusions

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TCW Energy Group

Energy Product Prices

$-

$12

$24

$36

$48

$60

$72

$84

$96

Sep-02 Sep-03 Sep-04 Sep-05

$/B

bl

$-

$2

$4

$6

$8

$10

$12

$14

$16

$/M

MB

tu

Nymex Crude - Monthly Nymex Gas - Monthly

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TCW Energy Group

Energy Capital Markets

0%

50%

100%

150%

200%

250%

300%

Jan-03 Jan-04 Jan-05 Jan-06

B+/B- Spread Over LIBOR 10-Yr TreasuryS&P Energy Equity Index High Yield Energy Index (%)

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TCW Energy Group

Trends in the E&P Markets

• After a period of debt reduction and share buybacks, E&P companies are spending more of free cash flow on drilling

• Public and private valuations are up

• Volumetric Production Payments are back

• Substantial private capital flowing into industry

• Public venture markets are active: AIM, Canadian Jrs.

• Seller’s expectations are forcing buyers to bid aggressively for assets

• “Land rush” in unconventional gas plays

• Equity markets are rewarding predictable and visible reserve and production growth

• Clear winners: “Resource Plays”

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TCW Energy Group

Implications…..

• Market environment has created a windfall for many

• Hedging is necessary to support valuations and acquisition prices

• Value creation going forward likely to be based more on field enhancement/drill bit than market timing/arbitrage

• Companies have been afforded the opportunity to innovate (improved completion methods)

• Access to/Quality of services is key concern

• Large independents re-positioning their asset profile with a focus on long-lived reserves and low risk drilling

• Capital providers forced to be flexible

• Non-traditional financing sources tend to “loosen” market discipline and exit when times get tough

• High commodity prices can mask underlying problems – “point of caution”

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TCW Energy Group

TCW Version of Mezzanine

• Broadly defined: high yield senior to preferred equity

• Flexible: Not tied to a particular structure

• Partner-like, long term orientation

• Current pay plus kicker (royalty, warrants, cash flow participation, PIK)

• Low to mid-teens rate of return: fees, coupon, kicker

• Amortization provides exit; call protection

• Secured by assets and/or shares

• Minimal Covenants: Make bet on management team and assets

• Alternative to equity

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TCW Energy Group

US - E&P Mezzanine Finance Providers

28 Players have entered the E&P Mezzanine market, only 10 remain

MG

1990 1992 19981996 20001994 20021982 198819861984

TCW

RIMCO

ENCAP

Torch

Enron

Cambrian

Beacon

KCS

Stratum

Koch

Wells Fargo

Tenneco/Range

Deutsche Bank

Cargill

Aquila

Mirant

Duke

Shell

Macquarie

Goldman Sachs

Williams

Petrobridge

2004

Source: Wells Fargo

Prudential Black Rock

RBS

Constellation

Laminar

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TCW Energy Group

Oil and Gas Risk/Return Profile

EquityEquity

Pref. EquityPref. Equity

MezzanineMezzanine

VPPVPP

Senior DebtSenior Debt

TCW Sweet Spot

30% +

25%

15%

10%

6%

Risk

Return

PDP PDNP PUD PROB/POSS Exploration Prospects

Engineering Risk Geological/Geophysical Risk

TCW’s focus is on engineering and development risk, not geological and exploration risk

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TCW Energy Group

Mezzanine Debt Applications

• Fills void in capital structure between equity and senior debt

• Small to mid-sized companies that cannot access the public markets

• Isolate assets in a separate non-recourse project financing

• Accelerate development drilling program

• Acquisition, monetization, or recapitalization

• Reduces the amount of equity required, thereby increasing the leverage and ultimately the equity returns

Mezzanine Debt is a viable alternative when designing the optimal capital structure

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TCW Energy Group

Mezzanine Debt Applications

• Use of mezzanine capital can lower capital costs, increase equity returns,

and increase ownership

Equity

Equity

60%

100%

Equity OnlyAll in Capital Cost 14%

Equity & MezzanineAll in Capital Cost 10%

• Lower Capital Costs• Higher Equity Return• Greater Ownership

Equity

30%

100%

80%

60%

Equity30%

Mezzanine15%

Bank Debt6%

Equity30%

Bank Debt6%

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TCW Energy Group

TCW Energy & Infrastructure Group

• Among leading providers of institutional capital for the energy sector in North America

• Niche investor exclusively focused on energy and infrastructure sectors

• 24-year track record; by far the longest in the industry

• 12 funds with more than $6 billion of capital and 175 portfolio investments

• Invested in 16 countries on 5 continents

• 20 professionals (6 engineers)

• Recent funds raised for investment:

– TCW Energy Fund X - $734 million unlevered fund for mezzanine and equity investments in US, W. Europe and Australia

– TCW Global Project Fund II - $700 million leveraged fund for high yield senior investments on a global basis

– TCW Global Project Fund III - $1.5 billion leveraged fund for investment grade senior loans on a global basis

In 2005, the TCW Energy Group invested $894 million in 27 separate transactions in 10 countries.

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TCW Energy Group

EIG Product Platform

Mezzanine and Non-Control Equity

Special Situations

High Yield Senior

Senior Debt GPF III

GPF II

Fund X & Cogen

Client JVs & Separate Accounts

Enhanced Market Penetration Benefiting All Products

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TCW Energy Group

TCW Overview

• Established in 1971

• The TCW Group, Inc. is an indirect subsidiary of Société Générale, S.A.

• Approximately $123 billion committed or under managementas of December 31, 2005

• Over 1,625 institutional and private clients

• Staff of over 600 individuals, including over 355 professionals

• Offices: TCW SG Asset ManagementLos Angeles ParisNew York LondonHouston Tokyo

SingaporeHong Kong

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TCW Energy Group

Conclusions

• Producers have choices when choosing a capital provider

– Stability and partnership orientation are key

• TCW is bullish on prices long term

• New pricing environment, combined with hedging, has created new opportunities

• Consolidation should continue as companies utilize excess cash flow and access private equity

• Market appears to have accepted new higher levels for commodity prices

• Mezzanine capital will continue to be a viable alternative

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TCW Energy Group

TCW E&P Contacts

Kurt Talbot 713-615-7426Managing Director kurt.talbot@tcw.com

Patrick Hickey 713-615-7410Senior Vice President patrick.hickey@tcw.com

Curt Taylor 713-615-7410Senior Vice President curt.taylor@tcw.com

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TCW Energy Group