In the wake of last year’s oil bust, energy industry lenders arestill keeping a tighter grip on their money. However indicationsare some banks and investors are starting again to look for placesto put capital in the energy patch.

Considering speeches given by banks, mezzanine debt and privatecapital sources at Gas Daily’s Upstream Finance conference lastweek in Houston, it would seem capital is readily available toproducers right now. However, like producers, lenders have beenchastened by the recent crisis in oil prices. Tim Murray, seniorvice president energy group manager for Wells Fargo Bank, notedtrends in the commercial bank market.

Spreads have stabilized, and there is a return to a historicalpremium for loans to producers, he said. The number of deals isdown, and credit structures have been tightened. There is lessliquidity in the syndicated loan market and an increased focus on”sensitivity” analyses. Lenders also have placed a renewed focus oncurrent producer cash flow versus borrowing base values.

Murray also predicted what is to come for bank energy lending.Spreads will include an industry premium. As major producers divestthemselves of domestic assets the volume of deals will increase.Credit structures will remain tight, and liquidity will improve inthe syndicated loan market as new players emerge. There also willbe a renewed focus on commodity hedges.

Last year’s major oil price decline made public markets tightfor smaller producers, noted Robert Zorich, managing director ofEnCap Investments. Banks retrenched, and producers found themselvesde-leveraging rather than drilling. He predicted majorrecapitalizations and consolidations will continue. While pricesare rebounding, the industry and lenders need time to become”believers.”

Formed last year, mezzanine lender Shell Capital has a number ofcriteria that must be met before it will loan to producers, saidMichael Keener, Shell Capital vice president for businessdevelopment. The company is looking for deals worth $10 million andup, and the more the better. Shell will provide up to 90% ofproject funding and wants to provide 100% of development capital.”We want to make sure you have the capital. If we’re going to gointo a project, you’re going to have the capital to do the project,so we want to pay for that and get you all that money just be sureit will happen. We don’t want economics at a later date to impedethe project.” Shell also requires producers to hedge. “We want youto hedge, and we will recommend what we think is the right amountof hedging.”

Private capital financing comes in when a company hasinsufficient cash flow to support bank financing, is fullyleveraged, has an aversion to recourse debt, or desires moreflexibility in debt structure,” said Gary Tanner, vice president ofprivate lender EnCap Investments, which was recently acquired by ElPaso Energy. Public capital might be unattractive to a companybecause of an unreceptive market, an unwillingness to become apublic company, or the need for quick transaction turnaround.

Private capital lenders take a longer-term outlook than banksand are less reactive to market downturns. Deals can close quicklyand there are capabilities for creative structuring. A privatecapital lender brings energy expertise to a producer as well asmarket analysis and insight. All this has its price, though.Private lenders want higher returns, and it’s possible to losecontrol of one’s company to a private lender.

When producers get in trouble it is usually the result of one ormore factors, said Bart Schouest, managing director with BanqueParibas. Putting a producer’s back to the wall can be decliningprices, poor drilling/development results, problems with costcontrol and capital structure challenges. When a company findsitself in trouble, action must be taken. Bankers aren’t satisfiedto wait around for prices to improve, Schouest cautioned. Steps totake include the development of a comprehensive restructuring planwith reasonable expectations. Borrowers should be prepared torestructure bank debt. Among other actions, a non-core divestitureprogram should be outlined; commodity hedging should be evaluated;operating costs should be cut and production maintained.

Joe Fisher, Houston

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