Determining ???Value??? Measured vs Perceived

1. Determining???Value???MeasuredvsPerceived Curt S. Taylor, Managing Director TCW Asset Management Company Energy & Infrastructure Group

2. 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!”

3. Bubble Theory Real Estate 2000 $ O&G 1970-80 Internet /Tech 1990 Sub Prime 2008 Comm-odities Oil/Gold/Coal 2004 High Yield Bonds 1970 Stock Market 1980 ?

4. Bubble Theory Barnett Shale $ Codell CBM Haynesville Shale Woodford Shale Austin Chalk Deep Anadarko ?

5. Value? • Measured------Cash Flow Monetized Value • Perceived---------Asset Potential Value

6. Cost of CapitalMarket Sorts it Out Google Rate +20% Perceived Value Equity $ Rate Risk Measured Value Debt Rate 4% T Bills

7. Measured Value • EBITDA Multiples – Equity Buyouts, Debt Covenants • PE Ratio – Stock Valuations • Years at Rate – Oil and Gas - DCA

8. Measured Value – Cash Flow 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: • 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)

9. Measured Value – PE Ratios Historical average of 15.71

10. Measured Value – Growth Rate 2% avg

11. Measured Value – Multiples

12. 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

13. Measured ValuePDP Monetization - Hedging • Debt • Share Prices • NPI’s • Production Payments • Royalty Trusts • Canadian Royalty Trusts • MLP’s • Sale of Assets

14. Measured ValueDebt Reserves x Price Deck (with Hedges) / Coverage Ratio(1.5) = Loan 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

15. Measured Value – MLP’s Monetize PDP

16. Measured Value MLP Yield vs Market Yield

17. Perceived Value 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

18. Perceived Value • Accounts Receivable - Quality • Equipment - Utilization • Goodwill – Name (i.e. Mars) • Real Estate – Location vs Timing • Houses – Debt availability • Prod vs Dev vsExpl – Oil and Gas

19. Perceived Value – AcctsRcbl • $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

20. Perceived Value Equipment Utilization

21. Perceived Value Equipment Utilization

22. Perceived Value - Goodwill BERKSHIRE HATHAWAY INC. Acme Brick Company Benjamin Moore & Co. International Dairy Queen, Inc. Clayton Homes The Pampered Chef® Fruit of the Loom MidAmerican Energy Holdings Company GEICO Auto Insurance Helzberg Diamonds Nebraska Furniture Mart Justin Brands See's Candies H.H. Brown Shoe Group Star Furniture Johns Manville Buffalo NEWS, Buffalo NY Wrigleys – Coca Cola – H&R Block

23. Perceived Value - Houses Median – Half are below, Half are above Mean – Average of all Note – This includes their houses

24. Perceived Value - Houses Avg US House Price vs Mortgage Originations Loans Originated Trillions 1 2 3

25. Perceived Value - Houses % Mortgage Payment to Income (by middle income person buying median priced house) Loans Originated Trillions 1 2 3

26. Perceived Value - Houses • 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?

27. Perceived Value Oil & Gas Risk <<Risk>> Percieved Measured TIME >>>>>>>>>>>>>>>>>>>> Rates/Reserves/Geology/Fracturing/Relative Perm/Multiple Seams

28. 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

29. Perceived ValueType Curves (An Exact Science)

30. 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?

31. Shale Plays • PDP’s – Measured Values • Acreage – Perceived Value

32. Cost of CapitalMarket Sorts it Out Google Rate +20% Perceived Value Equity $ Rate Risk Measured Value Debt Rate 4% T Bills