Baird Branches Out

“If we can get to $6 or greater on gas and $60-plus on oil, all aspects of the energy sector can function extremely well…,” says Baird energy-banking team co-founder Curtis Goot.

When Baird, a Milwaukee-based investment bank, decided to expand its energy-investment reach, it tapped two industry veterans to lead the charge. In late April, the privately held, equity capital markets, financial advisory and wealth-management firm announced that Curtis Goot and Frank Murphy will co-lead its new energy-banking team, focusing on E&P companies and master limited partnerships (MLPs). No strangers to entrepreneurial endeavors, the two were eager to repeat the success they achieved when they founded and grew the A.G. Edwards & Sons Inc. energy-investment group in the mid-1990s

Goot and Murphy are each former managing directors at Wells Fargo Securities. Prior to Wells Fargo, they led the A.G. Edwards energy group from St. Louis, which became a part of Wachovia in 2007. From 2002 to 2007, under their command, A.G. Edwards was the most active manager of MLP offerings, the leading book runner of MLP IPOs under $100 million, and a leading manager of E&P equity offerings.

“When Baird approached us, we saw the proposal as a very compelling opportunity and a chance to build another energy-banking team all over again,” Goot says. “The 90-year-old firm has a well-established, global investment-banking platform and, historically, it’s been very strong in industrials, manufacturing and business services areas. Over time it has added real estate, health care and technology groups, among others. But it was missing a key piece in its business platform—energy.”

The duo will remain in St. Louis, and the firm’s announcement represents the first of several planned expansions in the energy sector.

Baird’s capital-markets arm, which includes banking, research, sales and trading, creates synergies for the benefit of clients, Goot says.

“This model gives us an advantage in the market. But introducing the firm to the oil and gas sector will have its challenges.

“Our clients’ initial question is going to be ‘Who is Baird?’ since it’s a brand new name in the energy space. But we’re confident in our model and plans are already under way to put together an impressive group of senior E&P and MLP analysts,” he says.

“The upstream MLPs will stay in a good buyer’s position as long as some of the larger companies continue to sell off non-core assets to pursue shales and oily projects,” says Frank Murphy, co-founder of Baird’s new energy-banking team.

With the capital markets still in flux, the timing of the launch is ideal, Murphy says. “There was a period during the height of the financial crisis when most energy companies were locked in with their lenders out of fear. It was natural for them to feel like they needed to give their business to the firms that held their loans. But now companies feel like they can choose financiers based on which ones provide the best services. Management teams are really starting to evaluate their financing options.”

Rebounding Markets

Last year’s credit crunch and the downturn in commodity prices prompted a sharp pullback in energy lending. But thanks to the rebound in oil prices, hedging that was in place, growth in the high-yield market and the general easing of the crisis, the banks soon found themselves in a much more comfortable position.

“During that period several companies appeared to be overlevered, but many took advantage of the good conditions in the debt markets,” Murphy says. “The net amount of money banks had outstanding in terms of loans actually decreased in the energy sector. Now it seems many banks have excess capital and want to increase their energy lending.

“On the equity side, investors have an interest in funding growth projects. Shale players and oil-weighted names are attracting a lot of attention from investors. Gas-weighted players are facing a bit of a headwind in the capital markets right now, but this should reverse itself in due course.”

The bankers also say that, after a bit of a hiatus, they’re starting to see some MLP IPOs tee up. There are very few securities that can offer yield and growth, and for a decade MLPs have proved that they can provide both. Over time, the compound annual return to investors from MLPs has been in the 20% range.

When the broad market turned downward because of the financial crisis, MLPs were also affected. In early 2009 investors were staying away, but there was steady improvement throughout the year, Murphy says. Yields for smaller MLPs reached the high teens, and now they’re in the middle-to-upper single-digits range.

“There’s been a dramatic improvement, and it’s been mirrored by what’s going on in the debt markets. In the case of MLPs, individual investors have been seeking yields and attractive places to put money. With money markets paying less than 1%, investors have calmed down and moved from ‘panic mode’ to ‘how can I actually make some money?’”

Yield-type investments are going to be important this year, with Murphy expecting significant investment from retail investors. Institutional investors are interested, but there are lingering concerns about the direction of the gas market. For now, many gas-oriented E&Ps are turning to joint ventures for growth while oilier names are tapping the financial markets directly to advance projects.

Murphy says, “With the proliferation of private-equity funds and the number of companies that want to be sold or need to go public, the capital-market activity should continue to increase.”

At the end of the day, whether an entity wants to invest depends on valuation, Goot says. “If investors can pick up an attractive company in a great play, they’re willing to invest. Experienced management teams with good assets will always find capital.”

Both bankers expect the M&A pace to pick up. Murphy says upstream MLPs are particularly well positioned because of the number of traditional independents interested in pursuing growth projects.

“There’s an industry view right now that some traditional reserves and properties aren’t strategic to some independents’ goals. These assets are generating cash flow, but I think a lot of the independents are going to look for ways to divest some traditional properties, which will play right into the hands of the upstream MLPs. They are the ideal owners for those income-generating properties that aren’t sexy. The upstream MLPs will stay in a good buyer’s position as long as some of the larger companies continue to sell off non-core assets to pursue shales and oily projects.”

Goot adds, “The openness of the capital markets will always be one of the greatest predictors of M&A activity. Commodity prices are also important, and banks have a lot of capital to put to work because they got more of it back in 2009 than they anticipated. You also have a strong bond market, both investment grade and non-investment grade (most E&Ps and MLPs are not investment grade). As long as these things continue, M&A activity will flourish.”

Behind the Headlines

In late April, the news of the Deepwater Horizon explosion and subsequent oil spill in the Gulf of Mexico galvanized the energy industry and the government. While the stocks of companies involved in the disaster took a hit, overall investment levels in the energy sector are holding steady. How does an event like this impact the capital-raising side of the business?

“It’s a tragedy, but BP Plc and the rest of the industry are handling the situation professionally,” Goot says. “The oil spill itself isn’t going to have a major impact on raising capital for energy companies or projects; Washington’s response, however, could have a huge impact. If certain members of Congress decide to use this tragedy as an opportunity to lead us to a less-than-intelligent, silly energy policy, the capital markets will definitely be affected. It could become more difficult to fund the exploration and drilling that are so desperately needed in this country.”

Murphy says the government’s response to the oil spill, at minimum, will be a tightening of regulations, making it more expensive to do business in the Gulf of Mexico. As a result, permitting and related aspects could become more difficult, and operators in these areas may confront tighter access to capital.

“In a perverse way, the onshore companies, especially the ones that are gas-weighted, could be beneficiaries of this,” Murphy adds.

Meanwhile, as various market elements play out, commodity prices continue to alternately drive and dampen investors’ interest.

“As a conduit to the industry, I think there is a strong view that the economics for natural gas require a price closer to $6 to generate attractive returns and ensure producers’ access to capital,” Murphy says. “If the government were to adopt a policy that made natural gas a cornerstone and allowed gas to reach that $6 mark, we’d see a very attractive environment for years to come. It would serve both the interests of the independents and the country.”

Goot agrees. “If we can get to $6 or greater on gas and $60-plus on oil, all aspects of the energy sector can function extremely well, and there will be plenty of interest from investors, and adequate returns for all parties involved.”