Companies turned out in droves for the winter NAPE conference held in Houston on February 11 and 12. E & Ps expect new deals to begin flowing, and commercial bankers at the show said they are ready to fund them—a sure sign of economic recovery for the energy industry.
Comments from the exhibitors indicated a strong desire to fine tune asset portfolios, by buying, selling or, as in the case of Dallas-based Merit Energy Co., both.
"We are selling noncore assets," said Robby Rocky, business development manager for Merit. "But we are looking to buy good assets, too." The majority of Merit’s assets, mostly long-lived conventional oil and gas plays, are in the Midcontinent.
Should Merit choose to fund acquisitions by leveraging debt, it will find most commercial bank doors wide open. An example is CIT Energy, a subsidiary of CIT Group, which repaid more than $700 million of bailout funds.
"We are working with our existing customers now, but we are open for new deals," said Jerry Jeram, CIT managing director. "Our new business model is closer to normal commercial banking than before. We won’t be looking for mezzanine and high-yield deals this year. We became a regular bank in 2008, and we are conforming to those banking regulations now."
Commercial bankers’ price decks are somewhat conservative on the oil side, but that may change after the first quarter, if oil prices stay above $65 per barrel. Bankers are closely watching their peers and are calculating decks based on strip prices and the Macquarie Tristone energy lenders’ price deck survey (published quarterly in Oil and Gas Investor).
"We live and die by that energy lender survey," said Parul June, banking officer for Sterling Bank, which is lending based on $45 oil for 2010 and $50 oil for 2011. The bank’s natural gas deals are based on $4.50 per thousand cubic feet (Mcf) for 2010 and $5 for 2011. The Sterling group of bankers agreed that many E & Ps are finding 7% to 10% cost of unsecured capital and are using it to pay down credit facilities—a trend that should continue for the rest of the year.
Also, bond investors hungry for yield are buying bonds based on probable and possible reserves. In some cases, those investors are taking risk for a relatively low yield of 7% to 9%, said the bankers.
Blake Kirshman, assistant relationship manager for BBVACompass, quoted a price deck closer to $50 oil for 2010 and $65 for 2011. "We’ve picked up four new deals recently, and we’ve seen the deal flow pick up during the past five months," he said. "Business is strong."
Although the consensus is that energy lenders are open to new deals, the cost will probably increase in 2010. Citibank’s senior relationship manager, Dan Davis, said his bank is looking carefully at returns now. "Higher-priced debt will open up the credit markets, but the higher spreads are just the costs returning to a normal range."
Davis noted that, in some cases, "there is a cloud over gas deals, due to the current oversupply," but winter drawdowns of gas storage are encouraging. "Also, $70 crude prices make oil deals easier to do. We see that business is returning to normal. We are open for business and actively looking for new relationships,” he said.
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