January 14, 2009
IPAA Private Capital Conference
Jason T. MeekManaging Director, Corporate Finance
RBC Capital Markets
Conditions in the Energy Capital Markets
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’09 Energy Capital MarketsPrivate EquityBanks
Conditions in the Energy Capital Markets
3
Overview of RBC Capital Markets
Assets $632 B Credit Rating Aaa / AA-
Ranking by Assets in North America #5 Market Cap ~$42 B
Assets under Admin. $562 B Employees Worldwide ~80,000
#1 in E&P Equity for 2008
$28 Billion Committed to North American Energy Companies
Top Tier A&D Advisor in-house (Richardson Barr)
Top-Tier Research (Equity and High Yield)
4
Emerging Leader in North AmericaRBC has maintained its strong capital position relative to its competitors
RBC has demonstrated unique stability during the market dislocation and increased its leadership across investment banking products
Ascending rank by % marketcap lost
(1) Source Bloomberg and FactSet. Write-downs and equity capital raised based on Q3 2007 to date
RBC on Top Again Financial PostJanuary 31, 2008
RBC Capital Markets Hires from U.S. Rivals to Expand Bloomberg NewsAugust 20, 2008 RBC Hires Again on Credit Crunch Fallout
Financial PostJuly 08, 2008Moody’s Affirms RBC’s Ratings
Moody’sMay 30, 2008
Battle for the 'bulge' business; RBC gets paws on global customersNational PostSeptember 29, 2008
WriteDowns (1) $14 B $97 B $66 B $56 B $16 B $27 B $49 B $13 B $5 B $21 B $2 B
Equity Capital Raised (1) $14 B $11 B $74 B $30 B $25 B $56 B $31 B $11 B $21 B $45 B $1 B
Market cap. (US$bn)(1)
Current (1/9/09)
2007 (1/1/07)
$108.6
$12.0
$85.4
$20.2
$273.7
$36.8
$82.3
$18.6
$127.0
$42.3
$239.8
$65.2
$88.7
$33.2$84.8
$27.9
$96.9
$61.0
$41.5
$41.4
$0.0
$167.6
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Energy Capital Markets
Current global recession
Global oil demand expected to decline 0.6% in 2009
US natural gas demand expected to remain flat for 2009
Uncertainty of new administration
Volatility of current equity markets
Ongoing credit crunch
Necessity to shore up liquidity position
Decrease in borrowing bases by 15 percent to 20 percent(3)
OPEC is dependent of oil prices around $50.00/bbl to fund domestic programs and capital investments(1)
December production cuts of of 2.2 mmb/d; previous cut of 1.5 mmb/d in October
2H 09 Forward curve average of ~$56.00/bbl(2)
Tax cuts / economic stimulus package
Institutions on sidelines
E&P companies trading at below average multiples
Ample supply of private equity
Drop in natural gas rig counts should provide near-term price support
Headwinds Tailwinds
(1) “OPEC puts faith in deep cut to revive oil price” 12/16/08.(2) Bloomberg as of 1/9/09.(3) “Credit issues ahead for energy sector” 12/26/08.
E&P stock prices down approximately 52% for the year 2008
Commodity prices have dropped significantly through the second half of 2008
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Energy Equity Market Overview (January 2007 – present)
Source: Bloomberg, as of 1/9/09.
(100%)
(50%)
0%
50%
100%
150%
Re
lati
ve
Pri
ce
Pe
rfo
rma
nc
e
Large-Cap (3.5%) Mid-Cap (18.8%) Small-Cap (59.4%)
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E&P Sector – Multiple Comparison
Source: Factset, as of 1/9/09. Figures represent closing price at quarter end divided by trailing twelve months cash flow from operations.
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Current
Pri
ce
/ LT
M C
ash
Flo
w
Small-Cap Mid-Cap Large-Cap 10-year Average
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3.0x
5.0x
7.0x
9.0x
11.0x
13.0x
15.0x
$6,000 $9,000 $12,000 $15,000 $18,000 $21,000 $24,000
TEV / NTM Production ($/mcfe/d)
TE
V /
NT
M E
BIT
DA
Large-Cap Avg. Mid-Cap Avg. Small-Cap Avg. E&P MLPs
E&P Sector – Multiple Analysis
Source: Bloomberg, FactSet and Wall Street research. Note: “Peak” based on average of peak TEV / NTM EBITDA multiples for 2008.
7/11/08 “Peak”
1/9/2009
9
208
245
35
95114
248
146
292
156
230
289
179
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
0
50
100
150
200
250
300
350
Equity Market Activity
Source: Dealogic and FactSet as of 12/31/08.Note: Bold denotes RBC managed transaction.
2008 E&P Equity Deals
($ billions)
Equity Issuances – All Sector Equity Issuances – E&P Sector
0
6
11
8
11
7
9
5
10
4
5
3
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
0
2
4
6
8
10
12
14
16
($ billions)
Deal Pricing Transaction Deal Pricing TransactionType Date Issuer Shares Offered Offer Price Size (mm) Type Date Issuer Shares Offered Offer Price Size (mm)
FO 8/11/08 Petrohawk Energy Corp 28,750,000 26.53 762.7 FO 5/8/08 Petrohawk Energy Corp 28,750,000 26.39 758.7 FO 8/7/08 Kodiak Oil & Gas Corp 6,820,000 2.75 18.8 FO 5/5/08 Rex Energy Corp 8,500,000 20.75 176.4 FO 7/23/08 XTO Energy Inc 29,900,000 48.00 1,435.2 IPO 4/30/08 Pioneer Southwest Energy Partners 9,487,500 $19.00 $180.3 FO 7/17/08 GMX Resources Inc 2,000,000 70.50 141.0 FO 4/30/08 Range Resources Corp 4,435,300 66.38 294.4 FO 7/9/08 Chesapeake Energy Corp 28,750,000 57.25 1,645.9 IPO 4/24/08 Whiting USA Trust I 11,677,500 20.00 233.6 FO 7/8/08 Goodrich Petroleum Corp 3,000,000 64.00 192.0 FO 3/27/08 Chesapeake Energy Corp 23,000,000 45.75 1,052.3 FO 6/26/08 Cano Petroleum Inc 7,000,000 8.00 56.0 FO 3/19/08 BPZ Resources Inc 2,200,000 20.00 44.0 FO 6/20/08 Cabot Oil & Gas Corp 5,002,500 65.27 326.5 CONV 3/4/08 Bill Barrett Corp nm nm 172.5 FO 5/28/08 Arena Resources Inc 2,501,250 47.75 119.4 FO 2/14/08 XTO Energy Inc 23,000,000 55.00 1,265.0 CONV 5/21/08 Carrizo Oil & Gas Inc nm nm 373.8 FO 2/13/08 Carrizo Oil & Gas Inc 2,587,500 54.50 141.0 CONV 5/20/08 Chesapeake Energy Corp nm nm 1,380.0 CONV 2/11/08 GMX Resources Inc nm nm 125.0 FO 5/15/08 Atlas Energy Resources LLC 2,070,000 41.50 85.9 FO 1/29/08 Petrohawk Energy Corp 20,700,000 15.00 310.5
CONV 1/15/08 Pioneer Natural Resources Co nm nm 500.0
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High Yield Market Update
Source: Bloomberg
Spread (bps)
HistoricalAverage =
553 bps
12/30/90 = 1,096 bps
01/09/09 = 1,683 bps
Bear MarketsEarly ’90s = 717 bps1998-2003 = 752 bps
Bull Markets1980s = 377 bps
Mid ’90s = 400 bps
Bull Market2004-2007 = 372 bps
10/10/02 = 1,126 bps
Historical High Yield Composite Index Spreads
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High Yield Market UpdateHigh Yield Spreads Since January 2008
Source: Bloomberg
Spread (bps)
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09
HY Index Spread
BB Spread
B Spread
CCC Spread
On January 9th
3,037 bps
1,683 bps
1,450 bps
1,141 bps
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E&P High Yield – Spread to Treasuries
“BB” rated
Note: RBC data; comprised of a sampling of bonds from each rating category.
“B” rated
Spread (bps) Spread (bps)
417 bps
1,007 bps
200
400
600
800
1,000
1,200
1,400
1/8/08 1/9/09
+141% Increase
571 bps
2,236 bps
400
800
1,200
1,600
2,000
2,400
2,800
1/8/08 1/9/09
+334% Increase
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($1,307)
($2,323)
$452$185
$950
($647)
($1,856)
($1,118)($971)
$2,254
($41)
$1,017
($3,000)
($2,400)
($1,800)
($1,200)
($600)
$0
$600
$1,200
$1,800
$2,400
$3,000
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
High Yield Market
Fund Flows – All Sector
New Issuances – All Sector New Issuances – E&P Sector
Source: DealogicNote: Bold denotes RBC managed transaction.
2008 E&P High Yield Deals($ millions)
($ billions) ($ billions)
Pricing Principal Call Ratings Coupon Offer YTW SpreadDate Issuer (MM) Maturity Provision Mdy/S&P (%) Price (%) (bps)
12/09/08 El Paso Corp $500.0 12/12/13 MW T+50 Ba3/BB- 12.000 88.909 15.250 1362 06/24/08 Linn Energy $255.9 07/01/18 NC-5 B3/B- 9.875 97.684 10.250 616
06/24/08 Quicksilver Resources $475.0 08/01/15 MW-4 T+50 Ba3/B 8.250 98.655 8.500 475 06/16/08 Petrohawk Energy - ADD $300.0 06/01/15 NC-4 B3/B 7.875 98.750 8.110 455 05/20/08 Plains Exploration $400.0 06/01/18 NC-5 B1/BB 7.625 100.000 7.625 384 05/20/08 Chesapeake Energy $800.0 12/15/18 MW T+50 Ba3/BB 7.250 100.000 7.250 345 05/19/08 Forest Oil - ADD $250.0 06/15/19 -- B1/B+ 7.250 100.250 7.203 309 05/15/08 Sandridge Energy $750.0 06/01/18 NC-5 B3/B- 8.000 100.000 8.000 407 05/09/08 Petrohawk Energy $500.0 06/01/15 NC-4 B3/B 7.875 100.000 7.875 455 05/06/08 Atlas Energy - ADD $150.0 02/01/18 NC-5 B3/B 10.750 104.750 9.851 628
05/05/08 Newfield Exploration $600.0 05/01/18 NC-5 Ba3/BB- 7.125 100.000 7.125 329 05/01/08 Range Resources $250.0 05/01/18 NC-5 Ba3/BB 7.250 100.000 7.250 351
02/01/08 Petroleum Development $203.0 02/15/18 NC-5 B3/B- 12.000 98.572 12.250 867 01/17/08 Atlas Energy $250.0 02/01/18 NC-5 B3/B 10.750 100.000 10.750 713 01/11/08 Southwestern Energy $600.0 02/01/18 MW T+50 Ba2/BB+ 7.500 100.000 7.500 368
4
6
1
0
3
4
3
34
9
14
11
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
90
131
84
131
143
177
39
63
13
61
15
3$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
$80.0
$90.0
$100.0
Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
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Region Seller
Estimated
Value ($MM) Region Seller
Estimated
Value ($MM)
Appalachia Norse Energy (Nornew) $250.0+ Mid Continent Canaan* $300.0+ Appalachia Ultra/East (JV) 100.0+ Mid Continent Panther Energy 300.0+ Appalachia Victory* 100.0+ Mid Continent Pablo 200.0+ Appalachia Hanley & Bird 50.0+ Mid Continent Upland 30.0+
$500.0+ $830.0+
Ark-La-Tx Cubic* $250.0+ Permian Marathon* $300.0+ Ark-La-Tx EnCana (JV Partner) 200.0+ Permian Encana 100.0+
$450.0+ $400.0+
Barnett Shale Joint Resources $150.0+ Rockies Anschutz (Williston) $60.0+ $150.0+ Rockies Windsor (Williston) 50.0+
$110.0+ Gulf of Mexico Helix $250.0+ Gulf of Mexico Rosetta 100.0+
$350.0+
E&P A&D Market
Successful Deals
Q1 2009 Deals in the Market
Approximately $3 Billion currently being marketed
Very few deals on the market currently
RBC anticipates a much busier second quarter with many packages coming from Public sellers
($ millions)
Source: RBC Richardson Barr database.
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
Completed Deal Amount Failed Deal Amount
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What This All Means
Entry point for long-term commodity bullish investors
Low commodity prices + low valuations
Expected Distressed Situations – Bankruptcies?
Lower cash flow
Lower investment = slower / no reserve and production growth
Downward borrowing base adjustments
Negative reserve revisions
Little access to cash from asset sales until buyers return
Over-Equitized Equity Investment by Private Equity
2009 is “The Year of the Merger or JV”
Strong + Weak
Weak + Weak
JV for cash or carried interest to preserve liquidity
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It’s Not All That Bad, is it?
Yes it is – for now
However…
High Yield Market showing signs of life for BB names
Select equity transactions for opportunistic acquisitions or salvation
Significant assets should be available in 2009 for liquid buyers as a result of downward borrowing base adjustments
Merger of equals on an equivalent value basis always an opportunity but subject to bank participation
“It’s darkest before the dawn”
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Contact Information
Jason T. MeekManaging Director
Phone: (713) 403-5620Email: [email protected]
For an email of the presentation, please send “IPAA Presentation” in the subject line to