An abundance of capital was available to the oil patch during 2004 and a number of new capital providers took center stage to facilitate M&A deals and fund start-ups that energized the market last year. "Public markets for debt and equity-primary and follow-on-will do nothing but heat up in 2005," says Cameron O. Smith, managing director of Cosco Capital Management LLC, New York. "Institutional money will continue to seek access to energy, but will have difficulty in finding familiar names, almost all of which have already gone through their funding cycle. Many new names will come to the fore." And, he adds, "many more general investors will gravitate to energy, mostly betting on consolidation plays within the upstream, but also backing service and manufacturing." Grant Swartzwelder, managing director at Dallas-based PetroGrowth Advisors, believes the capital growth in 2004 is far from over. "With the general stock market still in flux and other industry segments stagnant, the oil and gas sector will remain the hot area for public and private capital. Private equity groups are trying to commit their current funds quickly so they can raise a follow-up fund and take advantage of the availability of money." Jeffrey Harris, managing director at Warburg Pincus in New York, says, "Moreover, many existing companies have generated significant cash flows from active drilling programs combined with attractive hydrocarbon prices that they are flush with capital for acquisitions, exploration and dividends." There is a financing gap right now between what value the stock market is giving assets and what value the traditional energy banks are placing, says C.K. Cooper & Co. managing director Alexander G. Montano, based in Irvine, Calif. But Wall Street has come to the rescue. "Commercial banks, even though they are trying to be competitive, continue to use price decks that, while increasing, are still relatively low. By contrast, issuers can go into the financial markets and hedge production for up to three years at prices significantly higher than the price decks used by energy banks," he says. "Wall Street has caught on, and a larger number of financial institutions are offering financial products that in effect provide for a higher advance rate, based in part on the ability to hedge future production." He expects the gap to continue to be large in 2005, and anticipates another strong year of capital markets activity. -Bertie Taylor

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