Determining???Value???

Measured vs Perceived

Curt S. Taylor, Managing Director TCW Asset Management Company

Energy & Infrastructure Group

True Meaning- Kids Baseball

Yelled Meaning "GOOD CUT!“ “YOU MISSED IT BY A MILE!”

"WAY TO WATCH THE BALL!“ “DON’T SWING, YOU’LL MISS IT!”

"MAKE IT BE THERE“ “WAIT FOR THE WALK!”

"RELAX" ”YOU COULDN’T HIT A BARN DOOR!”

Bubble TheoryReal

Estate2000

High Yield Bonds 1970

StockMarket1980

O&G1970-80

Internet/Tech1990

?

$

Comm-odities

Oil/Gold/Coal

2004

SubPrime2008

Bubble Theory

WoodfordShaleAustin

Chalk Deep Anadarko

CodellCBM

?

$BarnettShale

HaynesvilleShale

Value?• Measured------Cash Flow

Monetized Value

• Perceived---------AssetPotential Value

Cost of CapitalMarket Sorts it Out

Risk

MeasuredValue

PerceivedValue

Rate

Rate4%

Rate+20%

$

Debt

Equity

Google

T Bills

Measured Value

• EBITDA Multiples – Equity Buyouts, Debt Covenants

• PE Ratio – Stock Valuations• Years at Rate – Oil and Gas -

DCA

• 50% Decline 1.72x• 30% Decline 2.63x• 10% Decline 5.55x• Flat 12.22x• 2% Growth 15.71x (Average S&P)• 10% Growth 75.00x (Google =25

@5/2010)

If a risk free rate of 3-4% is acceptable then the extra risk for taking risk goes up. What Yield do you need? 6%, 8%,

10%? Using 8% Return hurdle:

$1

$10

$100

$1,000

$10,000

0 5 10 15 20

Do

llars

Time

Measured Value – Cash Flow

Measured Value – PE Ratios

Historicalaverageof 15.71

Measured Value – Growth Rate

2% avg

Category Size 2007 EV/EBITDA Average

2008 EV/EBITDA Range

Large Cap $2,500 -$7,500 MM 7.4x 3.0x - 11.9x

Mid Cap $1,000-$2,500 MM 8.8x 3.0x - 12.7x

Small Cap <$1,000 10.0x 2.2x - 12.4x

Company Ticker 2007 EV/EBITDA 2008 EV/EBITDA

Southwestern SWN 16.0x 10.6x

Ultra UPL 24.1x 15.0x

CNX Gas CXG 16.2x 11.7x

Quicksilver KWK 15.5x 12.6x

NGAS NGAS 12.4x 9.2x

Geomet GMET 10.6x 11.4x

Carrizo CRZO 20.3x 12.2x

Bill Barrett BBG 8.4x 5.8x

Penn Virginia PVG 8.4x 6.8x

Range Resources RRC 13.6x 10.6x

Parallel Petroleum PLLL 12.7x 7.9x

Average 14.4x 10.4x

Measured Value – Multiples

TOP 200 Oil & Gas Companies

Total Assets $942MMM

Total SE $431MMM

Total Debt $511MMM

Total CF $109MMM

Multiple = 8.64

Loan Coverage ratio = 1.84

Measured Value – Multiples

Measured ValuePDP Monetization - Hedging

• Debt• Share Prices

• NPI’s • Production Payments

• Royalty Trusts• Canadian Royalty Trusts

• MLP’s• Sale of Assets

PDP Only• PDP = $10,000M PV10% Loan = $6,700M

PDP with Development• PDP = $10,000M PV10%

PNP = $2,000M PV10% ( 20% value to Non-prod)

Total = $12,000M PV10% Loan = 8,040M

Reserves x Price Deck (with Hedges) / Coverage Ratio(1.5) = Loan

Measured ValueDebt

Measured Value – MLP’s Monetize PDP

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

12/31/2004 6/11/2005 11/20/2005 5/2/2006 10/11/2006 3/23/2007

10-Yr TSY MLP Index

10 Yr. TSY forecasted to reach 4.80% by the end of

2007

Measured Value MLP Yield vs Market Yield

ART SALE!Only $120 million

Fernand Leger – Etude La Femme en Bleu$35MM

Edward Munch – Girls on a Bridge$25MM

Damien Hirst – For Love of God$100MM

NOTE: There are 2 different markets

Perceived Value

Perceived Value• Accounts Receivable - Quality• Equipment - Utilization• Goodwill – Name (i.e. Mars)• Real Estate – Location vs

Timing• Houses – Debt availability• Prod vs Dev vs Expl – Oil and

Gas

$1.15bn plant financing• Launch of retail syndication of a $1.15 billion credit facility to support

the development of a 620 MW power project in Northeast.• The sub-underwriters are expected to take tickets of $150-$200

million each.• The credit facility consists of a $250 million revolver, a $450 million

term loan A and a $315 million term loan B.• The tenor of the facility is construction plus seven to eight years for

the term loan A and construction plus 14 years for the term loan B. • Price talk is LIBOR plus 175 basis points for the revolver and term

loan A, and LIBOR plus 250 basis points for the term B tranche.• Fitch Ratings has issued a BBB minus rating (Investment Grade) for

the term loan A and the term loan B.• The project is expected to go into commercial operation by 2010.• The output of the baseload combined cycle gas turbine project is

fully contracted under a long-term power purchase agreement with Major Utility

Perceived Value – Accts Rcbl

Perceived ValueEquipment Utilization

Perceived ValueEquipment Utilization

BERKSHIRE HATHAWAY INC.

Acme Brick Company

International Dairy Queen, Inc.

Johns Manville

MidAmerican Energy Holdings Company

Nebraska Furniture Mart

Justin Brands

The Pampered Chef®

Clayton Homes

GEICO Auto Insurance

Helzberg Diamonds

Star Furniture

Fruit of the Loom

H.H. Brown Shoe Group

Benjamin Moore & Co.

Buffalo NEWS, Buffalo NY

See's Candies

Wrigleys – Coca Cola – H&R Block

Perceived Value - Goodwill

Perceived Value - Houses

Median – Half are below, Half are aboveMean – Average of allNote – This includes their houses

0

50000

100000

150000

200000

250000

1970 1975 1980 1985 1990 1995 2000 2005

Avg US House Price vs Mortgage Originations

Perceived Value - Houses

Loan

s O

rigin

ated

Tril

lions

1

2

3

2.0

7.0

12.0

17.0

22.0

27.0

32.0

37.0

42.0

Perceived Value - Houses% Mortgage Payment to Income

(by middle income person buying median priced house)

Loan

s O

rigin

ated

Tril

lions

1

2

3

• Houses have no cash flow• House values are determined by other house values• Money for houses comes from mortgages• 2005 — Loans worth $$3.167 trillion were originated• 2006 — Loans worth $2.858 trillion were originated• 2007 — Loans worth $2.312 trillion were originated• 2008 — Loans worth $1.490 trillion were originated • There was less money chasing houses

• Who’s to say houses weren’t worth that much?

Perceived Value - Houses

Perceived Value Oil & Gas Risk

Rates/Reserves/Geology/Fracturing/Relative Perm/Multiple Seams

TIME >>>>>>>>>>>>>>>>>>>>

Percieved Measured

<<

Ris

k>>

Perceived Value - Hot Plays

• Austin Chalk• Barnett Shale

• Fayetteville Shale• Powder River Basin CBM

• Bossier Sand• Cotton Valley

• Woodford Shale• Wolfberry

• Marcellus shale• Haynesville Shale• Gulf Coast plays

• Offshore• Bakken shale

Perceived ValueType Curves (An Exact Science)

Perceived Value - Technology

• Type Curves – an exact science• Geology – another exact science• Log Analysis – another exact science• Fracturing – another exact science• Seismic – another exact science• Proved Reserves – another exact science• Commodity Price – another exact science• Completions – new exact science?

Shale Plays

• PDP’s – Measured Values

• Acreage – Perceived Value

Cost of CapitalMarket Sorts it Out

Risk

MeasuredValue

PerceivedValue

Rate

Rate4%

Rate+20%

$

Debt

Equity

Google

T Bills