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JANUARY 19, 2006 IPAA PRIVATE CAPITAL CONFERENCE - PUBLIC CAPITAL MARKETS S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
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I P A A P R I V A T E C A P I T A L C O N F E R E N C E
J A N U A R Y 1 9 , 2 0 0 6
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Latest Fed minutes indicate that current tightening cycle may
end soon (as of 1/9/06)
Economic & interest rate forecasts
Note: JPMorgan forecast as of January 6, 2006. Forecasts are for the end of the period
¹Q4/Q4 change
Avg. 7.13%
Source: Bloomberg
Economic overview
Incoming economic releases for December generally support the view that the economy is currently expanding at a solid pace, while also rebounding from the effects of the hurricanes and related energy price spikes
Nonfarm payrolls increased only 108K in December, however the previously released November gain was revised up to 305K
Furthermore, it is likely that December hiring was held back by severe weather in various parts of the country, attributing to the jobless rate declining to 4.9%
The ISM non-manufacturing survey increased to 59.8 in December, while readings for both new orders and employment reached their highest levels since August
The ISM manufacturing survey declined 3.9 points to 54.2, however strong gains in December factory hiring suggest the drop is not a sign of significant weakening
JPMorgan expects the Fed to raise rates by 25 bps at the end of this month to 4.5%
The minutes from the last December 13 FOMC meeting implied that the removal of policy accommodation was no longer the motivating force for action, and instead further rate hikes will be implemented due to perceived inflation risk
JPMorgan forecasts growth to remain strong through the first half of 2006, and expects upcoming inflation indicators to modestly heighten Fed concern
Our macroeconomic forecast is thus consistent with the Fed funds peaking at 5.0% by midyear, but acknowledge that the risk around this forecast is to the downside
Treasury market overview
Treasuries rallied in the first week of the year, with the 10-year yield falling 2 bps to 4.37%
While the rally of the prior three weeks was driven by a decline in the market’s tightening expectations, the rally flattening implies that forward long-term yields remain lower than the market’s forward Fed funds expectations
The market is currently close to fully pricing in a rate hike at the January FOMC meeting, followed by a 58% chance of a 25 bp hike at the March meeting and a terminal Fed funds target of 4.68% by midyear
Although the curve steepened sharply following the release of the Fed minutes, it is still flatter than it was in mid-December
The flattening of the curve has caused the 2s/5s curve to invert, and prior to the release of the Fed minutes, the 2s/10s curve was trading essentially flat
The Treasury is expected to issue $99Bn of 10-year equivalents between next week and the end of February, making the current quarter one where the Treasury auctions a record amount of duration risk
1
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
Q4’05
Q1’06
Q2’06
21
25
15
25
25
Rate
Date
Min.
3.11%
Jun-03
Max.
15.68%
Oct-81
Current
4.37%
Jan-06
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
In 2005, equity markets were focused on rising interest rates, higher oil prices and consumer spending
Source: Bloomberg as of 12/30/05
1 The Conference Board
275 182 73 434 515 318 83 215 138
Consumer confidence improved going into year-end 2005 after showing its lowest reading since 2003 in October1
S&P 500
Oil prices in 2005 exceeded 2004 highs and the Fed continued to raise rates at a “measured pace”
Fed fund rate increased to 4.25% on 12/13/05
13th consecutive increase since June 2004
Fed funds rate
10/26—oil hits
2004 high $55.17
Crude oil
2
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Overall equity issuance remained strong in 2005 supported by continued mutual fund inflows
1 JPMorgan Equity Capital Markets Dept. and Dealogic
2 AMG data as of 12/30/05
U.S. equity issuance1
Equity mutual fund flows by investment style ($bn)2
Mutual fund flows, all equities ($bn)2
26
13
1
15
37
6
9
29
11
434
275
79
182
515
228
193
438
112
3
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
Total issuance
Growth
$41.1
$35.6
$14.7
Value
42.4
32.5
3.7
Income
31.8
48.1
18.2
International
28.3
72.9
104.0
Other
5.4
5.4
(1.0)
Total
$149.0
$194.5
$139.6
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Pricing dynamics in the U.S. IPO market continued to improve
IPO pricing statistics vs. the filing range
Commentary on IPO activity
Source: Equidesk as of 12/30/05; excludes closed-end funds
2004 witnessed a remarkable rebound in IPO issuance, which carried over to 2005
In 2005, 20% of IPOs priced above, 49% within and 31% below the filing range (vs. 2004: 19% above, 46% within and 35% below)
63% of 2005 IPOs are currently trading above issue price vs. 70% of 2004 IPOs
9 Oil & Gas companies raised $2.1bn in equity capital via IPOs in 2005
2006 is expected to yield the most O&G IPOs in recent years
2005 IPO sector issuance
Avg. Full Year Performance
($bn)
4
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Recent Oil & Gas new issuance has rewarded investors
Recent Oil & Gas equity offerings >$50mm
Source: Equidesk as of 12/30/05 ; Oil & Gas offerings
Note: Green shading indicates JPMorgan bookrun transactions; Yellow shading indicates JPMorgan co-managed transactions
1Bid / Last trade
2Last trade / Re-offer
Commentary on new issuance activity
Total issuance levels for equity and equity-linked securities in the Oil & Gas space have increased over time
$3.3bn in 2002, $9.6bn in 2003, $12.3bn in 2004, and $14.2bn in 2005
Recent equity issuance primarily driven by M&A activity and to finance accelerated capital spending
Most offerings have drawn strong investor demand
Most issuers have demonstrated strong aftermarket performance
Historical O&G issuance volumes ($bn)
3
E Q U I T Y M A R K E T U P D A T E
IPOs
Pricing
date
Issuer
% sec
12/13/05
365
22
11.2
100
-3.81
-3.62
N/A
Total/Mean
$2,286
13x
10.7%
-2.4%
-1.5%
10.6%
Median
7x
8.2%
-1.7%
-1.0%
-1.0%
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
U.S. Oil & Gas equity and equity-linked issuance displayed continued forward momentum in 2005
Mid/Large cap E&P
Integrated
4
E Q U I T Y M A R K E T U P D A T E
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
The top 5 underwriters have bookrun a majority of the issuance in the last two years
Source: Equidesk as of 12/30/05
Apportioned credit to each bookrunner
Recent JPMorgan bookrun Oil & Gas equity and equity-linked transactions
U.S. Oil & Gas equity and equity-linked – 2004
U.S. Oil & Gas equity and equity-linked – 2005
December 2005
5
E Q U I T Y M A R K E T U P D A T E
November 2005
March 2005
557
3.9
5
SectorTotals
$14,173
100.0%
49
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
High yield market 2005 recap and outlook
Market recap
The year began with strong carryover momentum from 2004
Yields were at their all-time lows of 6.99%;
Returns were outperforming almost all other asset classes;
Issuers, in a frenzy to take advantage of market conditions, had just made 4Q’04 one of the busiest quarters in the history of the market
However, O&G was a relatively strong performer
The market’s paltry yields and spreads in 2005 left it little cushion for bad news and it had only one way to go when bad news hit
GM / Ford;
Oil and its effect on inflation and discretionary spending;
Several high-profile bankruptcies;
Convergence trades gone awry at several hedge funds
Yields ended the year 117 bps higher at 8.16%, leaving investors with a sub-coupon 3% return
Hedge funds, central to the 2003-2004 bull market, largely withdrew from participating in new issues – not only was high yield no longer the market du jour, but the flat yield curve left them unable to employ the carry trades that had served them so well in 2003 and 2004
Retail investors pulled $9 billion from the market, with outflows three weeks out of every four
New issue volumes were down 30% vs. 2004, mainly as refinancing volumes plummeted due to fewer opportunities and the higher cost of capital
Portfolio managers, unable to count on rate-driven capital gains for returns, became much more selective, a trait that did not bode well for leverage levels, dividend recaps, CCC-rated credits, and deals for smaller issuers
Market outlook
With refinancing volumes down substantially, M&A activity became the key driver of supply in 2005
Mega LBOs were the trend of the year: Sungard, Intelsat, Hertz, Tim Hellas, Wind Telecom and Neiman Marcus were each larger than any LBO in 2004
M&A deals will continue to dominate supply – over $30 billion of financing is known to be coming, the largest pipeline in memory
Looking ahead, the critical variables for 2006 are:
How far will the Fed go before it stops raising rates
How well the market can digest the new issue pipeline
JPMorgan forecasts that the fed funds rate and 10-yr will reach 5.0% and 5.35% by May
With these assumptions, JPMorgan strategist Peter Acciavatti forecasts 3-4% returns for high yield in 2006, a level that implies capital erosion as current spreads are insufficient to absorb the expected increase in rates
Overall volumes in 2006 are expected to be down
0
2005
2004
2003
2002
2001
2000
1.9%
4.7%
1.7%
14.6%
3.7%
15.1%
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Putting today’s yields into perspective (as of 1/9/06)
JPMorgan High Yield Index
The JPMorgan HY Index is currently trading at a YTW of 8.03% - 243 bps inside of its long-term average of 10.46%
Over the last 19 years, yields have been lower only 22% of the time
The JPMorgan HY Index is currently trading at a STW of 368 bps, which is 203 bps inside of its long-term average of 571 bps
O&G related issues generally traded 100 - 200 bps inside of the average during 2005
JPM HY Index Avg. YTW = 10.46%
JPM HY Index Avg. STW = 571 bps
1
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
O & G sector led new issues in 2005
Source: JPMorgan
New issues by industry
The high yield market continues to see deals issued across a wide range of industries
New issues by rating
Single B deals continue to represent the majority of new issues
Paper/Packaging
5%
4%
2
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
2005 high yield - oil & gas highlights
($ millions, except bond prices)
3
8.16%
6.63%
6.76%
6.28%
9.875
100.00
9.875
601bp
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Current high yield market conditions (at 1/9/06)
Market commentary
Mutual fund flows
Weekly high yield new issue volume ($ millions)
Note: Friday to Thursday; includes crossovers
Note: Week-only reporters. Includes distributions
US Treasury yields (%)
The high yield market is in strong shape as we start the new year
A typical ‘January effect’ saw a robust first week of trading as the market ended higher on each day
The JPM HY index tightened 13 bps in the first week of January and currently yields 8.03%
Approximately $6bn in deals on the forward calendar
The JPM HY E&P index remains consistent with YE2005 levels
The technical landscape remains balanced
With no deals pricing over the last two weeks, investors are sitting on decent cash balances simply from clipping coupons and are eager to put money to work
Q1 is shaping up to be very active driven by large M&A financings - R.H. Donnelley's merger with Dex, NRG’s buyout of Texas Genco and Ineos’ acquisition of Innovene
Investor sentiment is firm yet watchful
Demand remains strong for well capitalized credits, but selective and yield sensitive for lower rated/aggressive credits
E&Ps and Energy are among most favored by investors currently
Overhanging uncertainties over the Fed’s future monetary tightening policy are keeping underlying yields tenuous
New issue volumes are another critical variable likely to impact secondary momentum
Market fundamentals should provide good support
Corporate earnings and economic growth are expected to remain strong
Default rates and distressed debt levels, though rising, are still well below historical averages
Dec 2004:
Dec 2005:
4
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
JPMorgan is the undisputed leader in leveraged finance
Source: Thomson Financial
2005 IFR Awards
#1 Global High Yield Bonds
#1 U.S. High Yield Bonds
#1 Syndicated Loans
#1 Leveraged Loans
#1 LBO financings
U.S. High Yield Bond House of the Year
European High Yield Bond House of the Year
Global Loan House of the Year
U.S. Loan House of the Year
Deal Awards awarded by IFR:
U.S. High Yield Bond of the Year - SunGard
U.S. Loan of the Year – SunGard
U.S. Leveraged Loan of the Year – SunGard
JPMorgan finished 2005 as the #1 bookrunner in both High Yield Bonds and Leveraged Loans
This marks the first time that a firm has finished #1 in both markets
2005 Leveraged Loan league table
Source: Thomson Financial
US
$20.00
-0.3%
OFS
11/21/05 Union Drilling 142 296 41.6 50 14.00 16.00 18.00 3.8 Drilling
10/26/05 Hercules Offshore 212 605 35.0 29 20.00 18.00 20.00 42.1 Drilling
08/15/05 Bronco Drilling 100 314 31.9 — 17.00 14.00 16.00 35.4 Drilling
08/04/05 Dresser-Rand Group Inc 652 2,214 29.5 — 21.00 19.00 21.00 15.1 Equipment
07/28/05 Superior Well Services Inc 84 233 36.1 21 13.00 11.00 13.00 82.8 OFS
07/27/05 Alon USA Energy Inc 188 723 26.0 — 16.00 14.00 16.00 22.8 Ref. & Mkt.
05/05/05 Bois d Arc Energy 176 834 21.1 11 13.00 12.00 15.00 22.0 E&P
01/27/05 W&T Offshore 240 1,253 19.2 100 19.00 16.50 18.50 54.7 E&P
12/16/04 Warren Resources 82 247 33.2 — 7.50 7.00 9.00 110.9 E&P
12/09/04 Bill Barrett Corp 374 1,034 36.1 — 25.00 20.00 23.00 54.4 E&P
03/25/04 Hornbeck Offshore Svcs. 80 267 27.6 — 13.00 13.00 15.00 151.5 OFS
02/04/04 TODCO 166 720 23.0 100 12.00 11.00 13.00 217.2 Drilling
Total/Mean $2,745 $726 30.6% 62.5%
Median $676 31.9% 42.1%
12/19/05 Warren Resources Inc $100 13x 13.3% — 0.0% -3.8% 9.1%
12/14/05 Dril-Quip Inc 156 16 15.6 50% -0.1 -1.2 -9.2
12/08/05 Chesapeake Energy Corp 629 2 5.5 — 2.0 0.0 0.9
11/17/05 Gasco Energy 84 11 18.1 — 3.8 -2.1 0.5
11/17/05 Brigham Exploration 104 17 19.6 — -12.7 -4.8 -1.2
10/27/05 Bronco Drilling 81 31 15.5 — -8.1 -1.1 0.0
10/18/05 Trico Marine Services 103 58 30.1 — -5.7 -2.4 8.3
09/29/05 Hornbeck Offshore Services 286 37 30.7 25 4.3 -2.1 -7.5
09/28/05 Whiting Petroleum 288 21 18.4 — 1.6 -3.3 -8.3
09/14/05 Southwestern Energy Co 600 7 12.0 — 6.8 -0.2 17.2
09/08/05 Chesapeake Energy Corp 301 2 2.7 — -1.1 0.0 -3.0
08/17/05 Bill Barrett 189 34 14.4 100 -5.8 -0.1 27.6
08/09/05 Hanover Compressor Co. 187 17 13.2 — -2.3 -2.1 -1.0
06/08/05 Range Resources Corp 114 6 5.6 — -1.0 0.0 6.3
05/13/05 TODCO 246 17 19.8 100 -9.9 -0.6 85.7
05/10/05 Goodrich Petroleum Corp 60 13 18.6 6 -15.8 0.0 63.3
04/14/05 GlobalSantaFe Corp 810 10 9.8 100 -7.2 0.0 39.8
03/29/05 Comstock Resources 125 10 11.2 — -3.8 -1.5 10.9
03/22/05 Pioneer Drilling Co 178 39 32.3 52 15.4 -1.0 46.4
03/17/05 Halliburton Company 2,529 12 13.4 100 3.6 -0.3 45.8
12/16/04 Edge Petroleum 58 15 24.3 — 1.6 -1.1 72.4
12/16/04 TODCO 269 23 24.8 100 2.9 -0.3 111.4
12/08/04 Range Resources 108 9 8.3 — -3.8 0.0 40.6
12/02/04 Cheniere Energy 300 17 20.5 — 13.1 -3.7 24.1
11/16/04 Whiting Petroleum Corp 282 49 30.2 12 -4.4 0.0 37.8
11/10/04 Energy Partners Ltd 60 12 10.5 100 -3.4 0.0 25.1
10/14/04 Superior Energy Services 137 21 15.0 100 -8.2 -1.2 71.8
10/13/04 Atwood Oceanics Inc 105 19 14.6 46 10.7 -1.5 60.9
09/30/04 McMoRan Exploration Co 91 90 30.4 — -13.1 -2.2 55.1
09/23/04 Petro-Canada 2,490 56 18.6 100 5.4 0.0 -20.5
09/15/04 TODCO 283 126 29.7 100 0.8 -0.9 141.7
Total/Mean $11,093 27x 18.0%
12/13/05 GlobalSantaFe Corp $980 7x 8.2% 100% -0.7%
1
-0.3%
2
-1.7%
1
-0.9
2
-0.3
1
-2.8
2
-4.7
1
-1.0
2
28.2
1
-1.4
2
48.3
1
-0.2
2
-6.1
1
-3.6
2
N/A
200320042005
54%
7%
62%
33%
45%
30%
77%
15%
53%
47%
23%
22%
23%
26%
65%
Refining &
Marketing
Exploration &
Production
IntegratedDrillingEquipment &
Services
200320042005
$5.4
$3.9
$0.2
$1.2
$10.1
$0.8
$3.2
$8.9
$2.1
ConvertFollow-onIPO
4 JPMorgan 1,054 8.5 8
5 Citigroup 1,047 8.5 6
6 CIBC 876 7.1 2
7 RBC 830 6.7 1
8 Goldman Sachs 776 6.3 5
9 CSFB 663 5.4 5
10 UBS 480 3.9 2
Sector Totals $12,372 100.0% 54
Rank
Manager
Amount
($mm)
% m
ar
k
e
t
share
Media
8%
Healthcare
9%
Services
10%
Telecom
10%
JPM HY E&P IndexJPM HY Refining Index
$5.7
$5.8
$10.7
$9.8
$11.4
20012002200320042005
Pricing
date
Issuer
Size
Security
Mat/call
Ratings
Coupon
Offer
price
Offer
yield
STW
15
Page
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
J A N U A R Y 1 9 , 2 0 0 6
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Latest Fed minutes indicate that current tightening cycle may
end soon (as of 1/9/06)
Economic & interest rate forecasts
Note: JPMorgan forecast as of January 6, 2006. Forecasts are for the end of the period
¹Q4/Q4 change
Avg. 7.13%
Source: Bloomberg
Economic overview
Incoming economic releases for December generally support the view that the economy is currently expanding at a solid pace, while also rebounding from the effects of the hurricanes and related energy price spikes
Nonfarm payrolls increased only 108K in December, however the previously released November gain was revised up to 305K
Furthermore, it is likely that December hiring was held back by severe weather in various parts of the country, attributing to the jobless rate declining to 4.9%
The ISM non-manufacturing survey increased to 59.8 in December, while readings for both new orders and employment reached their highest levels since August
The ISM manufacturing survey declined 3.9 points to 54.2, however strong gains in December factory hiring suggest the drop is not a sign of significant weakening
JPMorgan expects the Fed to raise rates by 25 bps at the end of this month to 4.5%
The minutes from the last December 13 FOMC meeting implied that the removal of policy accommodation was no longer the motivating force for action, and instead further rate hikes will be implemented due to perceived inflation risk
JPMorgan forecasts growth to remain strong through the first half of 2006, and expects upcoming inflation indicators to modestly heighten Fed concern
Our macroeconomic forecast is thus consistent with the Fed funds peaking at 5.0% by midyear, but acknowledge that the risk around this forecast is to the downside
Treasury market overview
Treasuries rallied in the first week of the year, with the 10-year yield falling 2 bps to 4.37%
While the rally of the prior three weeks was driven by a decline in the market’s tightening expectations, the rally flattening implies that forward long-term yields remain lower than the market’s forward Fed funds expectations
The market is currently close to fully pricing in a rate hike at the January FOMC meeting, followed by a 58% chance of a 25 bp hike at the March meeting and a terminal Fed funds target of 4.68% by midyear
Although the curve steepened sharply following the release of the Fed minutes, it is still flatter than it was in mid-December
The flattening of the curve has caused the 2s/5s curve to invert, and prior to the release of the Fed minutes, the 2s/10s curve was trading essentially flat
The Treasury is expected to issue $99Bn of 10-year equivalents between next week and the end of February, making the current quarter one where the Treasury auctions a record amount of duration risk
1
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
Q4’05
Q1’06
Q2’06
21
25
15
25
25
Rate
Date
Min.
3.11%
Jun-03
Max.
15.68%
Oct-81
Current
4.37%
Jan-06
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
In 2005, equity markets were focused on rising interest rates, higher oil prices and consumer spending
Source: Bloomberg as of 12/30/05
1 The Conference Board
275 182 73 434 515 318 83 215 138
Consumer confidence improved going into year-end 2005 after showing its lowest reading since 2003 in October1
S&P 500
Oil prices in 2005 exceeded 2004 highs and the Fed continued to raise rates at a “measured pace”
Fed fund rate increased to 4.25% on 12/13/05
13th consecutive increase since June 2004
Fed funds rate
10/26—oil hits
2004 high $55.17
Crude oil
2
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Overall equity issuance remained strong in 2005 supported by continued mutual fund inflows
1 JPMorgan Equity Capital Markets Dept. and Dealogic
2 AMG data as of 12/30/05
U.S. equity issuance1
Equity mutual fund flows by investment style ($bn)2
Mutual fund flows, all equities ($bn)2
26
13
1
15
37
6
9
29
11
434
275
79
182
515
228
193
438
112
3
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
Total issuance
Growth
$41.1
$35.6
$14.7
Value
42.4
32.5
3.7
Income
31.8
48.1
18.2
International
28.3
72.9
104.0
Other
5.4
5.4
(1.0)
Total
$149.0
$194.5
$139.6
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Pricing dynamics in the U.S. IPO market continued to improve
IPO pricing statistics vs. the filing range
Commentary on IPO activity
Source: Equidesk as of 12/30/05; excludes closed-end funds
2004 witnessed a remarkable rebound in IPO issuance, which carried over to 2005
In 2005, 20% of IPOs priced above, 49% within and 31% below the filing range (vs. 2004: 19% above, 46% within and 35% below)
63% of 2005 IPOs are currently trading above issue price vs. 70% of 2004 IPOs
9 Oil & Gas companies raised $2.1bn in equity capital via IPOs in 2005
2006 is expected to yield the most O&G IPOs in recent years
2005 IPO sector issuance
Avg. Full Year Performance
($bn)
4
I P A A P R I V A T E C A P I T A L C O N F E R E N C E - P U B L I C C A P I T A L M A R K E T S
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Recent Oil & Gas new issuance has rewarded investors
Recent Oil & Gas equity offerings >$50mm
Source: Equidesk as of 12/30/05 ; Oil & Gas offerings
Note: Green shading indicates JPMorgan bookrun transactions; Yellow shading indicates JPMorgan co-managed transactions
1Bid / Last trade
2Last trade / Re-offer
Commentary on new issuance activity
Total issuance levels for equity and equity-linked securities in the Oil & Gas space have increased over time
$3.3bn in 2002, $9.6bn in 2003, $12.3bn in 2004, and $14.2bn in 2005
Recent equity issuance primarily driven by M&A activity and to finance accelerated capital spending
Most offerings have drawn strong investor demand
Most issuers have demonstrated strong aftermarket performance
Historical O&G issuance volumes ($bn)
3
E Q U I T Y M A R K E T U P D A T E
IPOs
Pricing
date
Issuer
% sec
12/13/05
365
22
11.2
100
-3.81
-3.62
N/A
Total/Mean
$2,286
13x
10.7%
-2.4%
-1.5%
10.6%
Median
7x
8.2%
-1.7%
-1.0%
-1.0%
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
U.S. Oil & Gas equity and equity-linked issuance displayed continued forward momentum in 2005
Mid/Large cap E&P
Integrated
4
E Q U I T Y M A R K E T U P D A T E
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
Proceeds raised ($bn)
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
The top 5 underwriters have bookrun a majority of the issuance in the last two years
Source: Equidesk as of 12/30/05
Apportioned credit to each bookrunner
Recent JPMorgan bookrun Oil & Gas equity and equity-linked transactions
U.S. Oil & Gas equity and equity-linked – 2004
U.S. Oil & Gas equity and equity-linked – 2005
December 2005
5
E Q U I T Y M A R K E T U P D A T E
November 2005
March 2005
557
3.9
5
SectorTotals
$14,173
100.0%
49
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
High yield market 2005 recap and outlook
Market recap
The year began with strong carryover momentum from 2004
Yields were at their all-time lows of 6.99%;
Returns were outperforming almost all other asset classes;
Issuers, in a frenzy to take advantage of market conditions, had just made 4Q’04 one of the busiest quarters in the history of the market
However, O&G was a relatively strong performer
The market’s paltry yields and spreads in 2005 left it little cushion for bad news and it had only one way to go when bad news hit
GM / Ford;
Oil and its effect on inflation and discretionary spending;
Several high-profile bankruptcies;
Convergence trades gone awry at several hedge funds
Yields ended the year 117 bps higher at 8.16%, leaving investors with a sub-coupon 3% return
Hedge funds, central to the 2003-2004 bull market, largely withdrew from participating in new issues – not only was high yield no longer the market du jour, but the flat yield curve left them unable to employ the carry trades that had served them so well in 2003 and 2004
Retail investors pulled $9 billion from the market, with outflows three weeks out of every four
New issue volumes were down 30% vs. 2004, mainly as refinancing volumes plummeted due to fewer opportunities and the higher cost of capital
Portfolio managers, unable to count on rate-driven capital gains for returns, became much more selective, a trait that did not bode well for leverage levels, dividend recaps, CCC-rated credits, and deals for smaller issuers
Market outlook
With refinancing volumes down substantially, M&A activity became the key driver of supply in 2005
Mega LBOs were the trend of the year: Sungard, Intelsat, Hertz, Tim Hellas, Wind Telecom and Neiman Marcus were each larger than any LBO in 2004
M&A deals will continue to dominate supply – over $30 billion of financing is known to be coming, the largest pipeline in memory
Looking ahead, the critical variables for 2006 are:
How far will the Fed go before it stops raising rates
How well the market can digest the new issue pipeline
JPMorgan forecasts that the fed funds rate and 10-yr will reach 5.0% and 5.35% by May
With these assumptions, JPMorgan strategist Peter Acciavatti forecasts 3-4% returns for high yield in 2006, a level that implies capital erosion as current spreads are insufficient to absorb the expected increase in rates
Overall volumes in 2006 are expected to be down
0
2005
2004
2003
2002
2001
2000
1.9%
4.7%
1.7%
14.6%
3.7%
15.1%
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Putting today’s yields into perspective (as of 1/9/06)
JPMorgan High Yield Index
The JPMorgan HY Index is currently trading at a YTW of 8.03% - 243 bps inside of its long-term average of 10.46%
Over the last 19 years, yields have been lower only 22% of the time
The JPMorgan HY Index is currently trading at a STW of 368 bps, which is 203 bps inside of its long-term average of 571 bps
O&G related issues generally traded 100 - 200 bps inside of the average during 2005
JPM HY Index Avg. YTW = 10.46%
JPM HY Index Avg. STW = 571 bps
1
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
O & G sector led new issues in 2005
Source: JPMorgan
New issues by industry
The high yield market continues to see deals issued across a wide range of industries
New issues by rating
Single B deals continue to represent the majority of new issues
Paper/Packaging
5%
4%
2
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
2005 high yield - oil & gas highlights
($ millions, except bond prices)
3
8.16%
6.63%
6.76%
6.28%
9.875
100.00
9.875
601bp
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
Current high yield market conditions (at 1/9/06)
Market commentary
Mutual fund flows
Weekly high yield new issue volume ($ millions)
Note: Friday to Thursday; includes crossovers
Note: Week-only reporters. Includes distributions
US Treasury yields (%)
The high yield market is in strong shape as we start the new year
A typical ‘January effect’ saw a robust first week of trading as the market ended higher on each day
The JPM HY index tightened 13 bps in the first week of January and currently yields 8.03%
Approximately $6bn in deals on the forward calendar
The JPM HY E&P index remains consistent with YE2005 levels
The technical landscape remains balanced
With no deals pricing over the last two weeks, investors are sitting on decent cash balances simply from clipping coupons and are eager to put money to work
Q1 is shaping up to be very active driven by large M&A financings - R.H. Donnelley's merger with Dex, NRG’s buyout of Texas Genco and Ineos’ acquisition of Innovene
Investor sentiment is firm yet watchful
Demand remains strong for well capitalized credits, but selective and yield sensitive for lower rated/aggressive credits
E&Ps and Energy are among most favored by investors currently
Overhanging uncertainties over the Fed’s future monetary tightening policy are keeping underlying yields tenuous
New issue volumes are another critical variable likely to impact secondary momentum
Market fundamentals should provide good support
Corporate earnings and economic growth are expected to remain strong
Default rates and distressed debt levels, though rising, are still well below historical averages
Dec 2004:
Dec 2005:
4
I P A A P R I V A T E C A P I T A L C O N F E R E N C E
JPMorgan is the undisputed leader in leveraged finance
Source: Thomson Financial
2005 IFR Awards
#1 Global High Yield Bonds
#1 U.S. High Yield Bonds
#1 Syndicated Loans
#1 Leveraged Loans
#1 LBO financings
U.S. High Yield Bond House of the Year
European High Yield Bond House of the Year
Global Loan House of the Year
U.S. Loan House of the Year
Deal Awards awarded by IFR:
U.S. High Yield Bond of the Year - SunGard
U.S. Loan of the Year – SunGard
U.S. Leveraged Loan of the Year – SunGard
JPMorgan finished 2005 as the #1 bookrunner in both High Yield Bonds and Leveraged Loans
This marks the first time that a firm has finished #1 in both markets
2005 Leveraged Loan league table
Source: Thomson Financial
US
$20.00
-0.3%
OFS
11/21/05 Union Drilling 142 296 41.6 50 14.00 16.00 18.00 3.8 Drilling
10/26/05 Hercules Offshore 212 605 35.0 29 20.00 18.00 20.00 42.1 Drilling
08/15/05 Bronco Drilling 100 314 31.9 — 17.00 14.00 16.00 35.4 Drilling
08/04/05 Dresser-Rand Group Inc 652 2,214 29.5 — 21.00 19.00 21.00 15.1 Equipment
07/28/05 Superior Well Services Inc 84 233 36.1 21 13.00 11.00 13.00 82.8 OFS
07/27/05 Alon USA Energy Inc 188 723 26.0 — 16.00 14.00 16.00 22.8 Ref. & Mkt.
05/05/05 Bois d Arc Energy 176 834 21.1 11 13.00 12.00 15.00 22.0 E&P
01/27/05 W&T Offshore 240 1,253 19.2 100 19.00 16.50 18.50 54.7 E&P
12/16/04 Warren Resources 82 247 33.2 — 7.50 7.00 9.00 110.9 E&P
12/09/04 Bill Barrett Corp 374 1,034 36.1 — 25.00 20.00 23.00 54.4 E&P
03/25/04 Hornbeck Offshore Svcs. 80 267 27.6 — 13.00 13.00 15.00 151.5 OFS
02/04/04 TODCO 166 720 23.0 100 12.00 11.00 13.00 217.2 Drilling
Total/Mean $2,745 $726 30.6% 62.5%
Median $676 31.9% 42.1%
12/19/05 Warren Resources Inc $100 13x 13.3% — 0.0% -3.8% 9.1%
12/14/05 Dril-Quip Inc 156 16 15.6 50% -0.1 -1.2 -9.2
12/08/05 Chesapeake Energy Corp 629 2 5.5 — 2.0 0.0 0.9
11/17/05 Gasco Energy 84 11 18.1 — 3.8 -2.1 0.5
11/17/05 Brigham Exploration 104 17 19.6 — -12.7 -4.8 -1.2
10/27/05 Bronco Drilling 81 31 15.5 — -8.1 -1.1 0.0
10/18/05 Trico Marine Services 103 58 30.1 — -5.7 -2.4 8.3
09/29/05 Hornbeck Offshore Services 286 37 30.7 25 4.3 -2.1 -7.5
09/28/05 Whiting Petroleum 288 21 18.4 — 1.6 -3.3 -8.3
09/14/05 Southwestern Energy Co 600 7 12.0 — 6.8 -0.2 17.2
09/08/05 Chesapeake Energy Corp 301 2 2.7 — -1.1 0.0 -3.0
08/17/05 Bill Barrett 189 34 14.4 100 -5.8 -0.1 27.6
08/09/05 Hanover Compressor Co. 187 17 13.2 — -2.3 -2.1 -1.0
06/08/05 Range Resources Corp 114 6 5.6 — -1.0 0.0 6.3
05/13/05 TODCO 246 17 19.8 100 -9.9 -0.6 85.7
05/10/05 Goodrich Petroleum Corp 60 13 18.6 6 -15.8 0.0 63.3
04/14/05 GlobalSantaFe Corp 810 10 9.8 100 -7.2 0.0 39.8
03/29/05 Comstock Resources 125 10 11.2 — -3.8 -1.5 10.9
03/22/05 Pioneer Drilling Co 178 39 32.3 52 15.4 -1.0 46.4
03/17/05 Halliburton Company 2,529 12 13.4 100 3.6 -0.3 45.8
12/16/04 Edge Petroleum 58 15 24.3 — 1.6 -1.1 72.4
12/16/04 TODCO 269 23 24.8 100 2.9 -0.3 111.4
12/08/04 Range Resources 108 9 8.3 — -3.8 0.0 40.6
12/02/04 Cheniere Energy 300 17 20.5 — 13.1 -3.7 24.1
11/16/04 Whiting Petroleum Corp 282 49 30.2 12 -4.4 0.0 37.8
11/10/04 Energy Partners Ltd 60 12 10.5 100 -3.4 0.0 25.1
10/14/04 Superior Energy Services 137 21 15.0 100 -8.2 -1.2 71.8
10/13/04 Atwood Oceanics Inc 105 19 14.6 46 10.7 -1.5 60.9
09/30/04 McMoRan Exploration Co 91 90 30.4 — -13.1 -2.2 55.1
09/23/04 Petro-Canada 2,490 56 18.6 100 5.4 0.0 -20.5
09/15/04 TODCO 283 126 29.7 100 0.8 -0.9 141.7
Total/Mean $11,093 27x 18.0%
12/13/05 GlobalSantaFe Corp $980 7x 8.2% 100% -0.7%
1
-0.3%
2
-1.7%
1
-0.9
2
-0.3
1
-2.8
2
-4.7
1
-1.0
2
28.2
1
-1.4
2
48.3
1
-0.2
2
-6.1
1
-3.6
2
N/A
200320042005
54%
7%
62%
33%
45%
30%
77%
15%
53%
47%
23%
22%
23%
26%
65%
Refining &
Marketing
Exploration &
Production
IntegratedDrillingEquipment &
Services
200320042005
$5.4
$3.9
$0.2
$1.2
$10.1
$0.8
$3.2
$8.9
$2.1
ConvertFollow-onIPO
4 JPMorgan 1,054 8.5 8
5 Citigroup 1,047 8.5 6
6 CIBC 876 7.1 2
7 RBC 830 6.7 1
8 Goldman Sachs 776 6.3 5
9 CSFB 663 5.4 5
10 UBS 480 3.9 2
Sector Totals $12,372 100.0% 54
Rank
Manager
Amount
($mm)
% m
ar
k
e
t
share
Media
8%
Healthcare
9%
Services
10%
Telecom
10%
JPM HY E&P IndexJPM HY Refining Index
$5.7
$5.8
$10.7
$9.8
$11.4
20012002200320042005
Pricing
date
Issuer
Size
Security
Mat/call
Ratings
Coupon
Offer
price
Offer
yield
STW
15
