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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
3
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
4
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 (%)
5
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”
6
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”
7
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
8
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
9
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
10
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
11
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%
12
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.
13
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
14
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
15
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
16
TCW Energy Group
TCW E&P Contacts
Kurt Talbot 713-615-7426Managing Director [email protected]
Patrick Hickey 713-615-7410Senior Vice President [email protected]
Curt Taylor 713-615-7410Senior Vice President [email protected]