Despite the meltdown in the financial and commodities markets, a number of financial sources are still betting on oil and gas. Panelists at IPAA's recent Private Capital Conference, held in Houston, discussed investment drivers and expressed optimism about new capital flow.

John Shimp, managing director and co-head of the Americas, Bank of America Merrill Lynch Capital Partners, said he sees growing interest in companies at various stages of the growth cycle. Like many of its peers, Merrill Lynch prefers greenfield midstream developments in domestic unconventional plays.

"There are 24 private-equity firms getting into the greenfield energy midstream space," he said, but differentiating Merrill Lynch is its strategy of taking an active role in portfolio companies without having an operating-partner stance.

"Also, we are willing to take on less debt than some other energy private-equity investors," he said. "In fact, many capital providers are being very careful right now." He advised capital seekers to form relationships with several capital providers. Investors need the right upstream partners to make today's deals work, he said.

Andrew Campelli, a principal with Sageview Capital LP, characterized his firm as a "hybrid capital provider" because it invests in public and private equity, in debt, and "in everything in between."
"We are new to the energy business, but we do realize this is a cyclical business," he said. "We are focused on holding only three or four investments at a time, to avoid conflicts of interest."
Campelli said the firm has yet to invest in private E&Ps, having focused solely on publicly traded entities to date.

David Lazarus, senior vice president of energy structured products for Macquarie Bank Ltd., touted derivative finance as a preferred method of distributing capital to energy clients.
"We do hedging for small producers, and now we are getting into volumetric production payments (VPPs) and modified VPPs."

Modified-VPP structures may allow more risk transference and give the receiver cash before the delivery of production, which can be 12 to 24 months later. The firm also offers VPPs with limited override, proved-developed-nonproducing financing through a second lien or in conjunction with a VPP, prepay swap transactions and senior conforming debt.

"The prepay swap has several advantages over senior debt," said Lazarus. "It can take as little as three to four weeks to complete, the producer receives a higher advance rate, it comes with term financing, it is fit for small transactions, it is easy to unwind (like a hedge), there are no facilities fees, there are limited covenants (other than reserve and production tests), and it may have tax benefits."

Buddy Clark, partner with Haynes and Boone LLP, commented, "Yes, we worked on one of those. Good for producers, bad for lawyers, due to the lack of complexity."

Rob Lindermanis, managing director for Imperial Capital LLC (launched in November 2009), said investors have an appetite for energy, and noted that there is "an enormous amount" of uncommitted capital seeking investments for yields and returns. "Right now, investors favor midstream and service companies over E&Ps, due to perceived uncertainty," he said.

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