With some 25 years in the energy investment-banking business, Stephen M. Trauber has seen Devon Energy Corp. grow from less than $100 million in market capitalization to more than $40 billion. Involved in some of Devon’s earliest and later deals, the new head of energy banking for Citigroup Inc. says it’s an example of what is most rewarding in his work: “To help transform companies or bring them into the marketplace.” He was also involved in financing Anadarko Petroleum Corp.’s simultaneous $24-billion cash acquisitions of Kerr-McGee Corp. and Western Gas Resources Inc.; the $11-billion sale of Smith International Inc. to Schlumberger Ltd.; the spin-off of Cameron International Corp., now a more than $12-billion company, from Cooper Industries; and the IPO of Dril-Quip Inc., which has grown to more than $3 billion in market cap.

Houston-based Trauber recently left UBS AG, where he led more than $160 billion of transactions in his seven years there, for Citi, with 20 other UBS energy-practice colleagues and associates, including nine senior bankers. As vice chairman and global head, energy investment banking, Trauber is joined in the new Citi practice by partners Michael Jamieson, who focuses on midstream; Jerry Schretter and Sam Pitts, upstream; and Joel Foote II, energy equity. The practice consists of more than 100 bankers and support-team members, in offices from Houston to Beijing to Australia.

Trauber began his career in the 1980s with The First Boston Corp. (now Credit Suisse) and moved on to Morgan Stanley before joining UBS. Oil and Gas Investor visited with him in late January—when the new Citi team had already won several assignments in their first three weeks—on his view of current and coming capital markets.

“Energy is one of the most global and capital-intensive industries, so you need to work from a strong balance sheet—and a global balance sheet,” says Steve Trauber, vice chairman and global head, energy investment banking, Citigroup Inc.

Investor: Your plan is to create the No. 1 energy-banking practice in the world. How is this done?

Trauber: To be No. 1, you need globality—people who reach across the world. Secondly, enough people to serve clients, and not only deeply but broadly. Thirdly, the platform to distribute the services. Critically important in doing this is the size of the balance sheet you can access in underwriting deals. Energy is one of the most global and capital-intensive industries, so you need to work from a strong balance sheet—and a global balance sheet.

Investor: Which area of energy will generate the most transaction activity this year?

Trauber: Most active has always been, and will continue to be, the upstream sector. It’s probably the most fragmented business in the world, if you think about the number of participants—from the independents to the major integrateds to the national oil companies.

Midstream will be second-most active. There is a great deal of new demand for infrastructure, particularly in the U.S. as more shale-gas supply is developed and newly economic formations are identified. There is great demand for capital to fund this and there are new players entering the space.

Investor: The MLPs raised a considerable amount of capital in 2010. Will that wax, wane or flatten this year?

Trauber: The pace will be somewhat similar. Most investors in MLPs are individuals, not large institutions, and the retail stock-sales force has become more educated about this product as the number of MLPs and issuances has grown. A lot of capital moved to MLPs in the past year because interest rates have been low and individuals are looking for yield. Also, more institutional buyers are able to buy and hold MLP units today than a few years ago.

Investor: What about U.S. onshore joint ventures? Waning?

Trauber: There will be a few more in the coming year, but not at the rate at which we’ve seen them. The international buyers have mostly found their opportunities here and now have capital commitments going forward that will keep them satisfied with regards to growth objectives. Instead, I expect to see some corporate transactions. We’ve seen ExxonMobil acquire XTO (Energy Inc.) and Chevron plans to buy Atlas (Energy Inc.). There are companies that are looking for bigger opportunities than just a JV.

Investor: Will these corporate deals be for U.S. unconventional assets?

Trauber: There will be a mix—some for unconventional gas; some for conventional gas. Some will be oilier.

Investor: What are the prospects for building an oily E&P today?

Trauber: International clients are having a difficult time with competing with Chinese buyers as the Chinese have been aggressive. For domestic players, most are trying to find oily opportunities in the U.S., but there is a bigger universe of buyers here today and prices have gone up. There aren’t as many oily-focused opportunities here today as gas opportunities.

Investor: Will Russian E&Ps join in competing for U.S. E&P assets?

Trauber: The most active players in the past several years have been the Chinese and Indians, and, obviously, all of the major oil companies. We’re starting to see the Russians get more active on a global basis. They have looked in the U.S. In the case of the Russians, however, they have a fairly full plate of opportunities at home, so they are a little less aggressive in stretching to come to the U.S., although they are looking.

The Chinese’s interest is twofold. They like oily opportunities, and there are more of these of scale outside the U.S. On the natural gas side, they are looking to learn about unconventional gas, and bring that technology and know-how back to China and to their other assets around the world.

Investor: What’s your prognosis for the Gulf of Mexico?

Trauber: In deep water, until the cost to drill and the risk become significantly lower, it will be a basin for the majors and largest-cap companies. Smaller independents will look to exit or find ways to mitigate their risk. The majors will pick up those opportunities. As for the shelf, it will become more consolidated by the independents, among the select few that have scale to drive down costs and earn an acceptable rate of return.

Investor: And, for natural gas prices?

Trauber: There are two investment strategies on natural gas right now. There are those, be it private-equity investors or strategic investors, who have a positive view of the longer-term gas market, upwardly trending from where we are today. On the other side of the coin, there are those who are uncertain of how long it’s going to take. Supply continues to grow and the (Obama) administration has yet to adopt a supportive natural gas policy, so there are contrarians who believe we will be flush with gas for a long time. These are the investors looking to get longer oil or liquids. So, there is a contrarian investment opportunity in natural gas today, but it’s not a universally held perspective.

Investor: Will U.S. gas producers begin exporting some supply?

Trauber: I think you’re going to see a larger national debate around whether we should be exporting our natural resources. On the one hand, it creates jobs. And, as the current administration looks to 2012, it would like to see more job creation. But people will begin to think through this: These are 20-year (export) contracts. There may come a time when natural gas is shorter in supply and consumers will see prices increase. The subject of exporting U.S. gas will probably face a lot more debate.

Investor: Will as much money begin chasing unconventional plays abroad as has been spent in the U.S.?

Trauber: Absolutely, both in the amount of capital and the number of players. It will probably begin with investments by companies that are already in those regions, but it will ultimately expand to U.S. companies, as U.S. infrastructure gets built out and new growth opportunities are sought.

Investor: Is this a perfect capital world right now for energy companies?

Trauber: The equity markets are very receptive and are treating companies fairly well with regard to valuations. And debt capital is available and at an all-time-low cost. Energy companies’ cost of capital today is probably about as attractive as it’s ever been. Companies that want to grow through acquisitions or organically can do this today.

Investor: What do the most successful E&Ps have in common?

Trauber: First, diversification—not being weighted to gas or oil, so, as commodity prices swing, you’re balanced. Secondly, not being spread too thin—being focused and concentrated in operations to drive down costs. And thirdly, liquidity and a strong balance sheet to withstand downturns in capital markets and commodity prices. It doesn’t matter if you’re extraordinarily large or a small independent, if you maintain these three disciplines in your business, you will tend to do very well.