Upstream E&P has always been a feast or famine business, and now is a time of abundance. Great success rates and expansive resource plays have translated to a plethora of appetizing opportunities for firms engaged in finding and producing oil and gas ? rich gas, that is.

A panel at Hart Energy’s 11th Annual A&D Strategies and Opportunities Conference examined the various sources of capital that an upstream firm can use to fill its plate.

Private equity is available and plentiful in the E&P sector, said Murphy Markham, partner, EnCap Investments LP. “Our space is about $40 billion, with an additional $20 billion coming in,” he said. Private equity-backed E&Ps generally adhere to one of three strategies: acquire and exploit; lease and drill; or recapitalization.

The time-honored acquire-and-exploit strategy revolves around purchasing proved oil and gas reserves and adding value through accessing undeveloped resources. Lowering costs is a crucial component of this approach. This has been a traditional venue for private equity. But, in the past several years, the lease-and-drill approach has risen to prominence in lockstep with the growth in resource plays.

This popular approach starts with acreage acquisition, and as drilling success warrants well programs and additional leasing are layered on. In contrast, the recapitalization strategy targets known asset bases and known management teams. These tend to be opportunistic deals. Although there have not been a large number of these the dollar amounts have been quite significant, said Markham. Large private equity firms dominate recapitalizations.

The public debt side of capital access was examined by Paul Beck, executive director, Macquarie Bank. During the past four years, the E&P industry has accessed $76.4 billion in high-yield debt and $34.4 billion in leveraged loans, he said.

Overall, during the past 12 months some $200 billion in high-yield debt has been issued, and upstream E&P accounted for $30 billion of that. That’s a rise from E&P firms’ typical share of about 10% of total high-yield debt.

“It’s a very active market. Generally we see 10 to 20 issuances per quarter,” said Beck. “The majority of high-yield is going to large-cap and mid-cap companies.”

For leveraged loans, the total market during the past four quarters has been about $270 billion, but E&P firms have only taken on about $15 billion of that total. Leveraged loans are most popular with private and large-cap firms.

Despite all of the money available the bulk of companies seeking capital often have difficulty finding it, said Scott Cockerham, partner, Parkman Whaling. It’s a perennial problem for small firms. Additionally, the higher drilling and completion costs that operators are experiencing in resource plays are reducing funding options. Smaller operators work at a cash-flow disadvantage. “It’s the classic challenge where those who need financing have to provide collateral to traditional lenders,” says Cockerham.

There is definitely a funding gap between capital markets and private equity, and one solution can be a hybrid structure that uses private placements. “These are extremely flexible,” said Cockerham. “They can be any combination of debt, equity, rights or warrants.”

For a small initial contribution, an operator gains a flexible structure, control of drilling, an expanded investor group at low cost, and attractive exit potential. The investors gain equity participation with an income component, and also board representation. Additionally, the investments are staged so the projects have to meet certain targets to continue to receive capital. Naturally, hybrid structures have pros and cons. For operators, the investors hold the checkbook and the budgets are typically lean. On the investor side, they provide the majority of the funding but they own a minority interest.

So, large or small, private or public, companies have choices available to assuage their hunger for capital. Money may not exactly grow on trees, but now is a fruitful time to be in the upstream business, the panel members concluded.