Energy capital markets, from new equity to credit-default swaps, enjoyed burgeoning activity through the first quarter of 2010. And the trend appears set to extend through the second quarter, according to Oil and Gas Investor’s survey of recent equity offerings, debt markets and selected money executives.

In the equity sector, midstream giant Enterprise Products Partners LP confidently priced a public offering of 12 million common units representing limited partner interests at $35.55 each. Shooting for total gross proceeds of $426.6 million, the issue is expected to be well received in the market. Enterprise Products is granting the underwriters a 30-day option to purchase up to 1.8 million additional common units to cover over-allotments, if any.

Also, Bonavista Energy Trust completed a bought-deal equity financing for gross proceeds of $177 million, via a syndicate of underwriters co-led by CIBC World Markets Inc. and TD Securities Inc.
Debt markets are looking for deals too, according to Greg Pipkin, managing director and global head of the upstream vertical for Barclays Capital.

“Capital markets are wide open for producers,” he says. “All-in coupons are almost back to pre-crisis levels and there is a concern about rising interest rates as the economy recovers. Because of these factors, debt markets are more active than the equity markets.”

Oil-oriented producers are trading at better metrics than gas-oriented producers, he says, so the “oilys” are accessing the markets more often.

Mitchell Wurschmidt, vice president for KeyBanc Capital Markets Inc., agrees, stating that, “Over the past month or so, there has been a conscious shift in the mentality of E&P companies toward becoming oilier.”

Recent statistics support Pipkin’s and Wurschmidt’s bearish gas outlook. At press time, the near-delivery (May 10) price for light sweet crude was $85.84 per barrel, while natural gas settled at $4.19 per million Btu. According to UBS Bloomberg’s Constant Maturity Commodity Index, the price of crude has risen 6.3%, year to date, while gas has fallen by 19.6%.

Contributing to the continued depressed gas price was the Department of Energy’s April 9 report that some 87 billion cubic feet of gas was injected into working storage. That’s above the consensus forecast of 81 billion cubic feet and the five-year average injection of 21 billion. At the time of the DOE report, storage stood at 1.76 trillion cubic feet, 4% above last year at the same date and 16% above the five-year average.

Dan Steele, senior vice president and manager of the energy-lending group for Bank of Texas, is aligned with his peers’ mostly optimistic outlook.

“Compared to a year ago, E&P companies are returning to favor with capital markets. I would characterize the market as in a ‘cautionary’ state.”

Yet, he warns that the softness in natural gas prices should be an area of concern for all capital providers. Although capital costs have increased substantially from a year ago, most projections call for rates to remain stable with “some likelihood of a small upward movement in the latter half of 2010 and possibly carrying over to 2011,” he says.

In Steele’s opinion, the acquisition market, which contributes to growth for E&P lenders, was slow during the first quarter of 2010. A few large transactions occurred, but deals in the $50- to $500-million range were scarce, he says. But that has changed.

In April, Apache Corp., the second-largest independent U.S. oil producer, agreed to buy Mariner Energy Inc. for a whopping $2.7 billion in a cash-and-stock deal. Apache will assume $1.2 billion of debt. Its intention is to boost its production and reserves in the Gulf of Mexico’s deep water.

In the deal, Mariner owners will get 0.17043 share of Apache and $7.80 in cash for each of their shares. The value is 45% higher than Mariner’s closing price on April 14. Also, Apache plans to buy Devon Energy Corp.’s shallow-water Gulf oil and gas assets for $1.05 billion.

“This makes them a player now in the deepwater,” said RBC Capital Markets analyst, Scott Hanold, in a recent statement. “This could be the start of them consolidating some more deepwater interests.”
“We expect deal flow in the upstream to continue,” contends Stephen Richardson, analyst for Morgan Stanley & Co. Inc., in a recent report. “Low natural gas prices and accommodative capital markets continue to provide opportunity to those with financial flexibility. For capital-constrained producers with resource, divestitures or wholesale corporate sales…remain options.”

And the hits keep coming. According to analysts at Tudor, Pickering, Holt & Co. Securities Inc., the economy is recovering, oil prices are up and buyers are “less scared and want to buy and sellers can get decent absolute values.” The analysts say they expect more “blocking-and-tackling mergers and acquisitions” unless “oil or the S&P500 cracks noticeably.”

Although the news is good, some capital providers want even further improvement in the markets and deal-making.

Mickey Coates, executive vice president and manager of energy lending for Bank of Oklahoma, says, “I believe that there is capital to provide to the industry, but there is still not enough deal flow. In the past 30 days, we have seen more potential bank deals than we have seen for over a year. The banks have anticipated that more M&A would occur this year—and higher gas prices would help.”

Coates points out that all banks raised their pricing last year, and some of that may still be going on as debt facilities mature and come up for renewal. “The banks are just getting back to where they used to be, reclaiming their economics. I don’t think this will increase much from here unless the prime rate increases. We see at least a 50-basis-points increase in prime this year.”

In global capital markets, the notion of liquidity has gained increasing attention following the credit crisis that started in 2007. In fact, the past recession revealed a severe liquidity crisis that accompanied the credit crisis, writes Fitch Ratings Inc. author and managing director Jonathan Di Giambattista in an April 2010 report.

“Although overall credit-default swap liquidity in Europe has seen the most pronounced drop-off, North American oil and gas companies are trading with the most liquidity, on average. Within sovereigns, Chile and Ireland have seen the largest uptick in liquidity over the past month,” he states.