?Judging by comments in first-quarter conference calls and investment meetings, most E&P companies plan to expand their activity this year, which raises the question: Will capital markets buy in? The answer appears to be a resounding “yes.”


U.S. producers are expected to begin boosting capital expenditures, initially on land acquisitions and low-risk drilling this year, according to New York-based Jeb Armstrong, analyst for Calyon Securities (USA) Inc.
“While it is probably too early in the year for some companies to ratchet up spending, we will be listening for their willingness to consider doing so. Accelerating land prices have already begun to push spending higher.”


Smaller onshore companies are likely to be able to move fastest to ramp up drilling activity, which is likely to lift production, starting in the second half of the year, he says. “On average, we expect full-year organic production growth of 13.5%, which is the strongest growth this decade.”


From where will the money for such growth come? A good bet is that it will come from equity issuances. Despite an illiquid credit market and other economic woes, most institutional investors, high-net-worth individuals and investment banks are still enamored with the U.S. E&P story as independents continue to deliver significant value on the backs of high commodity prices and enabling technology.


“I think investors are still very much interested in investing in the entire energy complex, especially in upstream companies,” says Greg Pipkin, Houston-based managing director and head of the upstream vertical at Lehman Brothers.


“They are interested in good acquisition-and-exploitation companies and are willing to take on risk on new resource plays.”


Most of Lehman’s deals in upstream energy are resource-play transactions, including a secondary offering late last year for Midland, Texas-based Concho Resources Inc. The original stock offering was upsized from 8.7 million common shares to 11.8 million at $18.05 each. Lehman was the joint lead manager.


Lehman was also joint book-running manager for Oklahoma City-based SandRidge Energy Inc. for its initial public offering of 28.7 million common shares at $26 each. “Our book was over-subscribed on this deal, even when priced above the range, so the company decided to upsize the deal,” Pipkin says.


So far this year, Lehman has been joint book-running manager for Fort Worth, Texas-based XTO Energy Inc.’s offering of 23 million common shares at $55 each, Oklahoma City-based Chesapeake Energy Corp.’s 20-million-share offering at $45.75 per share, and Houston-based Petrohawk Energy Corp.’s issuance of 18 million shares at $15 each.


“That’s about $2.5 billion in equity in three transactions that we quarterbacked in first-quarter 2008,” he says. “The deals were received extremely well, probably due to the quality of the management and the fact that they are well positioned in resource plays that lead to growth.” All three companies are active in several of the burgeoning shale plays.


Last year, the energy industry saw about $50 billion in upstream asset-divestment deals, with Lehman involved in about half.


“It was all about the sale of Dominion assets and the asset restructuring and rationalization of Anadarko Petroleum Corp., which accounted for a significant part of the $50 billion of transactions,” he says.

Pipkin doesn’t think E&P M&A will be as active this year. “Unless there is another large corporate M&A transaction, I would say the asset M&A market is probably going to be about $25- to $30 billion this year.”


Lehman’s last corporate M&A assignment involved Houston-based Plains Exploration & Production Co.’s acquisition of Pogo Producing Co., in which Plains issued some 40 million common shares and $1.5 billion in cash.
Pipkin notes that market conditions for IPOs for master limited partnerships (MLPs) are weak this year. “I doubt there will be many upstream MLP IPOs until the yields come down and market conditions are better. The yields are so much higher now than they were a year ago. I think most people will wait until the yields are lower and the unit prices or the multiples of cash flow are higher.”


Still, the golden years for energy companies are still here, he says. The consensus is that energy is one of the few sectors in the general market where there is still an abundance of capital and projects are relatively easy to finance with equity.


“Having said that, the fixed-income markets are open, active and still more expensive than they have been during the past five years,” says Pipkin.

Key resources
Joe Foster, chairman of Houston-based TPH Partners LLC, agrees. TPH is a new private-investment division of energy investment and merchant bank Tudor, Pickering, Holt & Co. Securities Inc. and is focused on E&P, oilfield services and midstream.


Foster knows about recognizing opportunities. He began Newfield Exploration Co. in 1989, took it public in 1993 and turned it into a significant midcap E&P company. He retired from Newfield as chief executive in 2000, but stayed on as chairman until 2005.


Before joining TPH in 2008, Foster undertook solo private-equity investing with companies sponsored by Warburg Pincus, Kleiner Perkins and Goldman Sachs and with individual investors, and was on some of those companies’ boards.


“There is presently a fair amount of energy investment money available,” he says. “There are a number of institutions, funds and individuals that are very interested in the oil and gas business. It’s just a question of them finding the right company in which to invest.


“So many energy funds are so large now that they must seek to place $200- to $300 million at a time with a given management or set of assets. We think there is an opportunity to place $15- to $25 million at a time to achieve some good results.”


Parent TPH has a research group led by Dan Pickering, studying publicly traded energy companies. “They have a database of information about what’s going on with those we have targeted for investment, so we’ll rely on that research for private investment purposes. That helps us make assessments to evaluate investments that look interesting,” Foster says.


Foster plans to have a diversified portfolio of investments while sticking to the U.S. and Canada. TPH will invest in E&P, midstream and oilfield services. “We don’t have a predetermined allocation for the segments, so we’ll be opportunistic as they come along.”


For the other end, Foster and his partners are careful to formulate an exit strategy. “Obviously, when you invest your money, you hope for a return at some point. It may be three years. It may be eight years.”
He expects TPH will get a company up and running, while a larger private-equity fund will subsequently come in with additional capital to take it to the next level.


Why does a twice-retired oilman get back in the game a third time? “I didn’t expect to be doing this at my age. I had been investing in private equity on my own. But when Bobby Tudor talked to me about the possibility of joining his firm, I knew I’d have access to great people, resources for deal evaluations and the opportunity to serve on boards.


“It was attractive to me. I thought, ‘Well, if I am going to be in private equity anyway, I might as well be in there with some good support and good allies.’ I feel like I am accomplishing that by joining Tudor Pickering Holt.”

Momentum builds
New Orleans-based Stanley E. Ellington Jr., managing director of Dahlman Rose & Co. LLC, also says that, with commodity prices holding up so well, E&Ps and oil service companies will need additional funding to continue their aggressive acquisition and organic growth programs.


“I think the markets are going to be quite receptive to equity investments going forward. In the early part of the second half of 2007, we managed or co-managed four equity capital transactions in the E&P and oilfield-service space, but there was not much activity that went on thereafter in energy,” he says.


In the latter part of the first quarter of this year, there has been a substantial pickup in capital-raising activity by larger-cap companies and an increase in buyside demand, however.


Formed in 2004, the boutique Dahlman Rose firm is headquartered in New York, and has Boston- and San Francisco-based sales and trading offices, a Houston investment-banking and research office, and a New Orleans investment-banking office dedicated to E&Ps and oilfield-service companies. Dahlman Rose’s buyside clients are institutional investors.


Its New Orleans office was opened in June 2007, staffed with former Capital One Southcoast Inc. investment bankers. The office focuses almost exclusively on domestically headquartered, publicly held independents working both conventional and unconventional plays. Dahlman Rose also has a presence in Central and South America.


The firm provides services to companies with $100 million to $1 billion of market capitalization and principally handles equity financings as an underwriter or agent. Its deal size ranges from $25- to $250 million.


“The public markets for energy seemed to close down in the fourth quarter of last year and the first quarter of 2008,” says Ellington. “Last November and part of December was an anomaly, partly due to a significant increase in the number of convertible issues. That was the industry’s way of trying to avoid selling equity at too low a price. Another factor was a continuation of MLP offerings, which have pretty much dried up at this point.”


Things started opening up again in March. The fundamentals of energy, and particularly the commodity prices, have been extraordinary, says Ellington. “But the market was so choppy and rough that not very much was being done in public-capital raisings.”


Ellington worked several deals in the second half of 2007. The most interesting one involved a June $100-million registered direct equity offering for Tulsa, Oklahoma-based Arena Resources Inc.
“We led a group of five investment-banking firms in that offering. The offering was the largest registered direct E&P offering that had been done at that point in time. Both Arena Resources and we were extremely pleased with it.”


Ellington expects more equity transactions in 2008, relative to 2007, including IPOs, follow-ons, registered-directs and private investments in public equity (PIPEs). He sees substantial buyside interest in energy investments as evidenced by the turn-out at Dahlman Rose’s energy conference in March and turn-out at two simultaneously held, energy investment conferences in April—the Howard Weil event in New Orleans and IPAA’s in New York.


“I think it will continue to be a very vibrant year if the equity markets stabilize where they are or have a slight lift. It’s quite possible that we could have relatively high amounts of capital raised due to what appears to be a strong appetite from institutional investors for energy, particularly as we continue to pick up steam going into the middle of 2008,” he says.


Prospect-rich E&P and oilfield-service companies will find that the markets are wide open if they have a good use-of-proceeds record. “Energy stock prices have moved nicely upward, particularly in the latter part of March, and there appears to be a lot of momentum behind the energy sector. We certainly haven’t had too many commodity-price environments like this and that drives the strong fundamentals of the sector.”

Dalman Rose List Of Energy Deals