Matching the right kind of money to energy startups, strategies and projects has always been a key to success, but today, matchmaking is more difficult. Money is more expensive and harder to come by, capital providers are choosier and the deal pace is slower, speakers said at Energy Capital Week.

“It’s not always obvious sometimes how a financing can be done or how obstacles can be overcome, but it is always obvious when a deal is there [that should be done],” said Bill Weidner, managing director of the Rodman Energy Group.

Some $27 billion in private capital was available in 2008, according to Rodman. But, accessing that money is more difficult today, more expensive, and has more covenants tied to it. The bid-ask spreads are wide and the deal pace is not what it was during the first-half 2008 boom, although the best deals still get funded.

“I would expect the pacing of the investment of that money to be slow compared to past years, given what’s happened to commodity prices,” said Blake Webster, vice president, Quantum Energy Partners in Houston.

There are four basic strategies that private equity will fund, Webster said. It can be used for leveraged buyouts and recapitalization to take entities private. But in the energy space, private equity is more commonly used as venture capital for start-ups, growth capital for early-stage companies and more recently, funding for infrastructure projects. 

“The cost of capital for a pipeline is very different than for a South Texas E&P deal,” he said, “but in all cases, the owners have to have skin in the game alongside the capital providers.”

Thanks to low natural gas prices, not much in the proved undeveloped reserve category is economic, so providers of capital and asset buyers do not ascribe much value to PUDs, he said.

Quantum has committed more than $1.9 billion to some 40 energy companies since its inception in 1998, with some 22 portfolio companies today, he said.

“It’s a very interesting time to manage and invest capital,” said Kelly Plato, with NGP Capital Resources Co. “Right now we are focused on cash flow and PDPs, and we want a more significant piece of the reserves to be proved than before.”

This unit of Natural Gas Partners has about $100 million in dry powder, but “things are markedly different in mezzanine pricing than they were at this time last year.”

At the beginning of 2008 there were approximately 20 mezzanine providers, not counting commercial banks, but at present there are less than 10. Competition from investment and commercial banks has lessened and all capital providers tend to focus on existing clients now, not on new business, Plato said.

Mezzanine deal sizes are smaller and club or syndication deals are much harder to arrange. “Our hold size was $30- to $40 million but now it is more like $20- to $25 million. The partners we went to before are either out of the market entirely, or they’re focusing on the secondary market instead.”

The secondary market has better yields and liquidity at the moment, so original-issue deals are evaluated in light of this, he said.

Rodman’s Weidner provided a case study that proves that if a good deal is possible, it can be done despite the difficult climate. A private, family owned company in East Texas needed funding to develop its 100 billion cubic feet of gas potential, yet could not issue stock or get bank funding for exploration drilling. It was faced with limping along with a small budget, but family members deemed that no longer tenable.

The company had a dominant land position and exploration expertise, yet had royalty pools and a non-stock compensation structure—all anathema to private equity, he said.

Rodman’s solution was to spin off 95% of the growth-potential assets into Newco, which was funded by an investor that understood exploration risk and the specific plays involved. The proved reserves and debt were left behind in Oldco, where production was sufficient to service the debt.

The closely held Oldco and Newco negotiated a management fee so Newco is debt-free and has no employees. Rodman raised $40 million for Newco.