determining ???value??? measured vs perceived curt s. taylor, managing director tcw asset management...
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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
Cost of CapitalMarket Sorts it Out
Risk
MeasuredValue
PerceivedValue
Rate
Rate4%
Rate+20%
$
Debt
Equity
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
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
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
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 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?