The adage may say “never a borrower or a lender be,” but that doesn’t hold true for the energy business. Producers are chasing assets and capital providers are chasing borrowers at a time when most everyone believes gas and oil prices have reached a new deck. For energy industry capital markets these are “unique” times, and the United States is where the bulk of the action is.

If one were to gather all the energy financing deals that Warburg Pincus has turned down of late, “you could create an incredible fund just on the deals we’ve said ‘no’ to,” Peter Kagan, a managing director with the firm, told attendees at KPMG’s 2006 Global Energy Conference in Houston Tuesday.

Kagan shared a panel at the conference with Dan Condley, managing director in Banc of America Securities’ natural resources group. Both agreed that times are good for lenders in the oil patch. The most recently formed Warburg Pincus energy fund totals $8 billion, Kagan said, and in the last two years the firm has paid $150 million in fees to Wall Street firms, so its calls usually get returned, he quipped. Nearly every one of its energy funds has been a top-quartile performer. The firm has $2 billion spread across 25 companies, Kagan said.

Condley said that in the next few weeks Banc of America will announce another $400 million raised for a private energy firm. “Senior debt is what we do, day in and day out.”

Generally speaking, today’s deals are predicated on oil at $35 to $45/bbl and natural gas prices of $5 to $6/Mcf. Prices in that neighborhood can scare up a lot of previously uneconomic resources that have yet to come on line. Canadian oil sands, deepwater Gulf of Mexico as well as shale and tight sands gas plays all are looking good.

Condley said his bank generally doesn’t require that a producer hedge its production in order to get financing. Normally, about 30% of their production is hedged. However, now that figure is down to 5 to 10%, but acquisitions currently almost always require hedging to get the financing through.

Much has been said about energy industry capital moving overseas to avoid the rigors of Sarbanes-Oxley requirements in the United States. But Kagan said he sees a more robust market back home in the States where there are some real competitive advantages to be had, he said.

Bankers didn’t always take to energy like flies to sherbert. In the days before the dot-com bust, energy capital markets were largely ignored, the speakers said. The collapse of the dot-com sector changed that.

With hurricane season fast approaching, producers and their bankers are thinking about the cost to insure offshore rigs and business continuity: it’s up from a year ago. Condley said Banc of America now considers insurance a separate line item in company budgets. “It’s a significant part of cash flow.” Another tough hurricane season this year could wipe out more than just offshore platforms, it could take out the availability of hurricane insurance as well, Kagan said.

With times so good, those who were in the industry in the 1980s have to wonder if another bust is coming. Kagan noted that at the same time that energy commodity prices have set a new plateau, so has “basically every single commodity out there.” If there is an energy bubble it’s part of a larger commodity bubble, he asserted. “Even if it is a bubble, I still think that this is a fundamentally sound and good business to be in.”

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