TCW Asset Management Company MOGA Capital Markets Update

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TCW Asset Management CompanyMOGA Capital
Markets Update
Patrick Hickey Senior Vice President May 2006
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Table of Contents

• Market Perspectives
• Mezzanine Market Overview
• TCW Overview
• Conclusions

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Energy Product Prices

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Energy Capital Markets
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Trends in the EP Markets

• After a period of debt reduction and share
  buybacks, EP 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.
• Sellers 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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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 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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US - EP Mezzanine Finance Providers
28 Players have entered the EP Mezzanine market,
only 10 remain
Wells Fargo
TCW
Enron
Macquarie
Aquila
Beacon
Koch
Petrobridge
Torch
Mirant
RIMCO
Stratum
MG
Laminar
Cambrian
Williams
ENCAP
Duke
Constellation
Deutsche Bank
KCS
Shell
RBS
Tenneco/Range
Goldman Sachs
Prudential
Black Rock
Cargill
2002
1982
2004
1990
1992
1998
1996
2000
1994
1988
1986
1984
Source Wells Fargo
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Oil and Gas Risk/Return Profile
Return
Equity
30
25
Pref. Equity
TCW Sweet Spot
15
Mezzanine
10
VPP
6
Senior Debt
Risk
PDP
PDNP
PUD
PROB/POSS Exploration Prospects
Engineering Risk
Geological/Geophysical Risk
TCWs focus is on engineering and development
risk, not geological and exploration risk
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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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Mezzanine Debt Applications

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

Equity Mezzanine All in Capital Cost 10
Equity Only All in Capital Cost 14
100
100
Equity 30
Equity 30
Equity 30
Equity
80
Mezzanine 15
Equity
60
60
Bank Debt 6
Bank Debt 6

• Lower Capital Costs
• Higher Equity Return
• Greater Ownership

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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

In 2005, the TCW Energy Group invested 894
million in 27 separate transactions in 10
countries.
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EIG Product Platform
Enhanced Market Penetration Benefiting All
Products
Senior Debt
GPF III
High Yield Senior
GPF II
Mezzanine and Non-Control Equity
Fund X Cogen
Special Situations
Client JVs Separate Accounts
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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 Management
• Los Angeles Paris
• New York London
• Houston Tokyo
• Singapore
• Hong Kong

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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 EP Contacts

• Kurt Talbot 713-615-7426
• Managing Director kurt.talbot_at_tcw.com
• Patrick Hickey 713-615-7410
• Senior Vice President patrick.hickey_at_tcw.com
• Curt Taylor 713-615-7410
• Senior Vice President curt.taylor_at_tcw.com

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