From a deep understanding of the oilfield-service sector, these managing partners of their namesake firm can tailor many investment-banking solutions. From left, Joe Hoepfl, Ray Brown, Allen Parks and Len Paton.

Energy investment bankers expect 2008 to be an active year, with more international deals, MLPs and divestitures on the horizon despite recent gyrations in the stock and credit markets.

Experts at Tudor, Pickering, Holt?& Co. Securities Inc. and Parks Paton Hoepfl & Brown LP, two energy-focused investment-banking firms based in Houston, plan to be active.

TPH was formed in 2007 when Tudor Capital and Pickering Energy Partners merged. Bobby Tudor was a partner with Goldman Sachs & Co. in its energy investment-banking group. Dan Pickering founded Pickering Energy Partners Inc. in 2004. Previously, he was head of research at Simmons & Co. International in Houston.

Tudor, chief executive officer of TPH, says, “We think asset acquisitions and divestitures will be very active as companies look to rationalize their portfolios.” The firm started a unit in January that will focus solely on the upstream A&D front, headed by Denver-based managing director Ward Polzin, formerly with Canadian trust Enerplus Resources Fund.

As debt becomes more expensive in light of ongoing problems in the credit markets, energy companies will sell some of their oil and gas properties as an option to finance ongoing operations, Tudor says. In addition to asset sales, private companies are also monetizing.

The firm is working on the sale of three private Houston-based oilfield-services companies, with these deals expected to close later in 2008.

Tudor thinks publicly held energy companies will be more active in buying those assets or companies since the credit markets are less favorable to private-equity-funded buyers. “The public companies are back in the driver’s seat as buyers,” he says. “It was hard from 2005 to 2007 for public companies to compete with private-equity-funded buyers because the credit markets were so amenable to private equity.”

The public-equity markets for traditional E&P firms will also remain active in 2008, he says. TPH has worked on deals ranging from the $114-million Goodrich Petroleum Corp. secondary offering, XTO Energy Inc.’s $1.3-billion stock offering, and Carrizo Oil & Gas Corp.’s $75-million first-lien credit facility.

It also worked on several upstream initial public offerings, including SandRidge Energy Inc.’s $690-million IPO, Approach Resources Inc.’s $106-million IPO, and Rex Energy Corp.’s $112-million offering. Investors will continue to look for companies with growth opportunities, such as displayed by SandRidge’s strong IPO in 2007, says Pickering, TPH co-president and head of research.

The current market is an ideal environment for companies interested in going public. “You’ve got energy companies with unprecedented levels of profitability since commodity prices rose and they’ve had successful capital spending,” he says.

“We would expect private companies will access the capital markets via IPOs across the spectrum, in exploration and production, oilfield services and midstream, including the MLP arena.”

TPH advised El Paso Corp., the Houston gas producer and pipeline company, in forming its new, public midstream MLP, El Paso Pipeline Partners LP. The company needed advice in evaluating the key structural issues for the $500-million IPO and how it would affect the parent corporation, Tudor says.

“It was a very important transaction for El Paso. For them to look to us to provide advice tells you something about the quality and expertise of our people and our ability to compete with large firms.”

MLPs that want to grow their businesses will look toward doing IPOs or follow-on offerings, Pickering says. For instance, 2008 has already seen follow-on offerings by Kinder Morgan Energy Partners for $289 million and Enbridge Energy Partners for $196 million.

“There is always a subset of companies that want to build and grow as opposed to sell,” Pickering says.

As investors regain their interest in MLPs, more companies will start to consider them. The yield nature of MLPs will attract investors as other yields in the market decline, he says.

“As we go into 2008, the underlying fundamentals continue to look good and we anticipate at some point in the year the recent market tightness will be alleviated,” Pickering says. “People will be more interested in yields and the capital markets will be more receptive.”

Some of the MLPs that were cancelled will probably not go back onto the market, especially in the E&P space, he says, as investors are concerned about volatility in the sector.

“Investor appetite for reserves and for this product has waned,” he says.

However, midstream MLPs containing gas-processing and -pipeline assets will make a comeback, Pickering predicts.

The buyside is always searching for management teams “they can trust, assets they can understand and some ability to see nice sustained growth—whether it’s MLPs or oilfield services,” Pickering says. “Investors are still looking to play offense versus defense. Energy growth is inherently more interesting to them.”

TPH is expanding the business, having recently formed TPH Partners LLC. This new subsidiary is focused on private-equity investment opportunities and is headed by Joe Foster, the retired founder, chairman and chief executive of Newfield Exploration Co., which itself was started with private-equity from Warburg Pincus.

Oil-service focus

Parks Paton Hoepfl & Brown is a boutique investment-banking firm that provides financial advisory services solely to oilfield-service companies. In 2007, PPHB completed 11 deals worth an aggregate $1.2 billion, including M&A, recapitalizations, debt funding, equity funding and valuation analysis.

Its clients have ranged from offshore liftboat operators to drilling companies to businesses in oilfield construction and flow control.

“Our strategy has been to develop a deep understanding of our sector and strong relationships with its participants,” says Allen Parks, a managing partner with Len Paton, Ray Brown and Joe Hoepfl. All four previously did investment banking in the oilfield-service industry.

Last year, PPHB advised SPM Flow Control Inc., the Fort Worth-based frac-pump manufacturer, when it was acquired by the Weir Group Plc, a U.K.-based firm, for $665 million.

PPHB had marketed SPM Flow Control to a group of potential buyers, including several from Europe and Asia. The company is now called Weir SPM and is part of Weir’s clear liquids division.

“This is typical of most of our transactions,” Parks says. “We would rather market deals quietly to a few high-probability candidates than broadcast a deal widely across a market.”

Overseas buyers are interested in U.S. companies partly because about 70% of the world’s oil reserves lie outside North America.

“These deals are becoming more prevalent. Many international firms are interested in the capabilities and technologies of U.S. companies. They are coming here to get technology. International buyers are also interested because of their stronger currency.”

PPHB has also seen buyers putting up more equity, since there is less leverage available in light of the widening credit squeeze. “We’re more concerned about the availability of debt, but it has not been a problem so far,” says Paton. “It has not stopped any of our deals.”

Despite the tightening of the credit market, the oilfield-services sector will remain active, he adds. “We think it’s going to be a strong year. We have already closed three deals. Prices for both oil and gas are exceeding expectations. This should drive continued growth and investment.”

Recapitalizations using moderate leverage remain popular. PPHB recently represented Pegasus International, a Houston-based offshore engineering firm, in a recapitalization led by KRG Capital Partners LLC. The firm also represented Torqued-Up Oilfield Production Services LP, a Yorktown, Texas-based coiled-tubing company in a recapitalization led by Cadent Energy Partners.

PPHB also represented Gregory & Cook Construction, a Houston-based pipeline construction firm in its recent recapitalization and merger with H.C. Price & Co. The recapitalization and merger was led by SCF Partners, also of Houston.

Since about 70% of its clients are private, the firm focuses on establishing the valuation of a company.

“Private investors want to understand what drives value,” Brown says. “That’s a big part of what we are doing—understanding and communicating that to the market.”

One of the firm’s strengths lies in its knowledge of the private-equity market. The partners also bring a combination of investment-banking experience after starting their careers with oilfield-service companies.

The firm has worked on deals ranging from $25- to $650 million and typically works with companies that are generating positive cash flow—not companies in their earlier stages.

Since 2003, the company has closed 60 transactions worth more than $3 billion. “We paint the picture to the market, often with field knowledge of the technologies and services we’re selling,” says Parks.

PPHB also offers the biweekly “Musings from the Oil Patch” newsletter, authored by Allen Brooks, who has been an energy analyst for the past 30 years. He conducts proprietary research about oilfield-service companies and also concentrates on macro-drivers in the marketplace.