Since last fall, the investment-banking world has been roiled by turmoil and change, with the energy space affected as much as any other industry. But the most experienced people always land on their feet. Out of turmoil, they create new opportunities.

Take Sylvia Barnes, who was with Merrill Lynch Petrie, which was acquired by Bank of America last year. On April 1 she joined SMH Capital Inc. as group head of energy investment banking in Houston.

SMH Capital, the investment-banking arm of Sanders Morris Harris Group (Nasdaq: SMHG), is itself going through change. It’s in the process of receiving regulatory approval to be spun off as a private entity. Going forward, Sanders Morris Harris will still own 20% of SMH Capital, and employees will own about a 40% equity stake in the newly private firm.

At the same time, SMH Capital is beefing up its presence in oil and gas. Enter Barnes. “Our group is the largest in the firm and we’re hiring additional investment banking, research and sales and trading talent,” she says. “Two of our equity research analysts were just named ‘Best on the Street’ for 2009 in the engineering and construction and oilfield services sectors by The Wall Street Journal.”

Deal flow is going on through the transition. At press time, SMH was advising a public E&P client regarding an offer to be acquired, and assisting another public E&P company to make an acquisition.

With offices in Houston, New York, Dallas and New Orleans, SMH is a full-service investment bank. It provides private placements, public offerings of equity and debt securities, and advisory services in mergers, acquisitions, divestitures, restructurings and recapitalizations, institutional equity sales, trading, research, prime brokerage services for hedge funds, and fixed-income securities sales and trading.

Barnes, a native of Canada, comes to SMH armed with a Bachelors of Science in mechanical engineering from the University of Manitoba and an MBA from York University, Toronto.

Her engineering and finance career formally transitioned to investment banking when she joined Nesbitt Burns, the investment-banking unit of Bank of Montreal, while in New York in the mid-1990s. In BMO’s energy group, she focused on structured deals that were recognized as better suited to an investment- banking practice than commercial banking. Her group successfully closed hybrid transactions and advisory assignments such as Section 29 natural gas tax credit monetizations, and client-friendly drilling financing facilitated by intangible drilling cost (IDC) deduction tax-optimization.

She opened Nesbitt Burns’ office in Houston and its investment-banking practice grew while she was still residing in New York. “However, by 1996 it was clear that I needed to make the move south and recognize that most oil and gas roads lead to Texas,” she says.

While running the U.S. energy group in Houston, she advised on a variety of mergers, including Union Pacific Resources’ $3.4-billion acquisition of Norcen Energy, and King Ranch Oil & Gas Co.’s $70-million sale to St. Mary Land & Exploration Co.

We caught up with Barnes in Houston to chat about her new role, and the future of SMH Capital.

Investor It’s been such a tough environment for investment banking in the past nine months. Do you see any silver lining?

Barnes Sure. Some bright spots I see ahead are working with clients who plan for the best and anticipate the worst. I believe our transaction pipeline will be relatively full in 2009 because of the challenges and opportunities facing our clients in this unusually volatile commodity-price and financial-market environment.

Investor How does a woman from the plains of western Canada end up being the head of a Houston energy investment-banking group? Were either of your parents in finance or oil and gas?

Barnes My father was in finance and my uncle was an engineer, but no one in my family has been in the oil and gas business. I grew up in an agricultural, rather than an oil and gas, environment, but when I graduated from engineering, the oil and gas sector was clearly the most vibrant industry from the perspective of a young engineer.

Investor Some years ago, you were at Enron for a time. What did you do there?

Barnes Enron Energy Services was a rich 16-month learning experience. It allowed me to get back to my engineering roots. While there, I structured long-term energy supply deals for a variety of industrial entities, from fertilizer plants to appliance manufacturers, and I advised on innovative projects such as adding heat recovery units to sulfuric acid facilities to generate electric power.

Investor What led you to Petrie Parkman & Co.?

Barnes A lunch a couple of years earlier with Jim Parkman eventually led to an extended interview process with Petrie Parkman, and me ultimately joining what I discovered was the finest energy investment-banking firm in the world. As a private company, Petrie Parkman functioned very efficiently and served a broad range of energy clients.

I had the pleasure of working on a variety of successful transactions for both public and private companies. Some examples of interesting deals I worked on there included a $500-million capital raise for an affiliate of Halliburton, the $400-million sale of T-Bar-X to Burlington Resources, and two strategic acquisitions of natural gas reserves totaling several hundred million dollars for the Southern California Public Power Authority.

Investor But Petrie Parkman was acquired by Merrill Lynch in December 2006. That must have been quite a change.

Barnes Yes, but that led to a whole new set of opportunities. At Merrill Lynch we had a broader range of products to offer clients, but we still worked successfully on many deals within the traditional Petrie Parkman framework, e.g. the sale of Stone Energy’s Rockies assets to Newfield Exploration for $578 million, and the sale of StatoilHydro’s Gulf of Mexico shallow assets to Mariner Energy for $243 million.

Investor What do you foresee now that you’ve joined SMH Capital?

Barnes I have a strong belief it offers the right opportunity to go back to a privately owned firm with the freedom to focus first and foremost on clients. As an 80-person firm, with its largest industry group focused on energy, SMH Capital can be nimble and responsive to the needs of oil and gas companies as they explore strategic alternatives and access capital.

As a private firm, we have greater flexibility and can move quickly to capitalize on rapidly evolving opportunities. From my personal perspective, working at SMH Capital is a great opportunity to do the work I love, as an equity owner, with a great team.

Investor To that end, what is SMH working on in energy this year?

Barnes Currently, we are engaged as financial advisor by two publicly traded E&P companies in merger transactions, we have buy-side assignments for two natural gas transactions and we are placing capital for a Permian Basin drilling deal. We’re also working on a large PIPE (private investment in public equity) involving crossborder interests.

Investor What outlook do you have for the rest of 2009?

Barnes I expect we will see more deals this year using stock as currency, and a continuance of more private capital transactions. In addition, I anticipate investment-banking activity in the latter half of this year increasing as companies address distressed situations, especially as favorable commodity hedges continue to expire. This will include our involvement with mergers, asset sales, restructurings, special committee work, fairness opinions and other advisory services.

Investor What are some lessons learned from your previous job that you can apply now?

Barnes Now more than ever, I think investment bankers will need to put client needs first, which is the clear modus operandi I internalized at Petrie Parkman.

Investor In this current environment, will we see more debt-for-equity swaps by distressed bondholders in oil and gas companies?

Barnes Yes. An increased level of debt-for-equity conversions and restructuring deals is inevitable in this environment. We probably will not see quite as high-drama situations as Chrysler, but the fundamental issues are analogous. Cash-flow projections for several upstream companies clearly are not sufficient to satisfy senior note debt service over the next two years.

Management teams who are proactive and seek solutions in advance will likely achieve better results for shareholders in the long run. Senior note holders will want to see their priority interests protected, and in the absence of sufficient cash flow, some thoughtful and creative restructurings involving debt-for-equity conversion are likely.

Investor It looks like the equity window for energy has opened up. Will equity have to be sold at a discount and only through bought deals?

Barnes Bought deals continue to provide a comfort level in this still-volatile market, but we are seeing the equity window open in selective ways, e.g. for limited partnerships. In May we co-managed equity offerings for Holly Energy Partners and Enterprise Transfer Partners.