F?or more than 40 years, Robert D. Wagner Jr. has been an energy banker. There is probably not much he hasn’t heard before, and he is on his third major industry downdraft.


Wagner graduated from College of the Holy Cross with a BA in history, and served with the U.S. Marine Corps in Vietnam in 1965 and 1966. He then began his career at Bankers Trust in New York, and received an MBA in finance from New York University. He moved to Houston in 1974 to ride the energy boom, and in 1981 became head of energy lending for First City Bancorporation, then the primary bank for energy in Houston.


Then came the bust. He built a loan-workout team for First City when the oil collapse gave way to wholesale deterioration in loan quality from 1983 to 1986.


After a stint at Bear Stearns, he returned to Bankers Trust to organize its energy equity research program from 1993 to 1995, in support of its entry into the public equity markets. Wagner helped rebuild the bank’s oil and gas corporate finance activities in the Southwest, resulting in 20 new clients and some $4 billion in transactions through 1998.


From 1998 to 2001, he was in early retirement. He next worked for Arthur Andersen & Co., leaving before the firm went out of business.


Today, he divides his time between old energy haunts in Houston and his retirement home in California. He is an advisor to Rivington Capital Advisors LLC, the boutique energy-investment firm his son, Chris, co-manages in Denver and Houston. Last year he received an MA/PhD in mythology from the Pacifica Graduate Institute in California.


One of his favorite sayings, from Charles Darwin, applies to these challenging times: “It is not the strongest of the species that survives…but the most responsive to change.”


Investor How does this financial crisis compare to what you saw in the 1980s?

Wagner One difference is that now we have private equity available, which didn’t exist for energy in 1986. Back then it was either bank debt or public equity, and there was no high-yield market either. Today the industry is much more resilient and responsive.


Investor What was that downturn like?
Wagner The E&P companies suffered, but almost to a man they survived. But on the service side, those companies were heavily leveraged and had to have workouts. We were kind of inventing the wheel then because there were no workout bankers around—after all, Houston had had a good economy for 30 years.

Investor Your advice for E&Ps?
Wagner Manage for near-term cash. Hedging may help, and operating expenses may also decline, but it’s unlikely they’ll come down anywhere near the level of the ultimate declines in revenue. It requires an aggressive ordering of priorities: 1) operating/production expenses; 2) core overhead; 3) taxes; 4) interest on debt; 5) PDNP development; 6) other development; 7) exploration.
The uncertainty of oil and gas prices, well costs and the availability of equipment and services requires a “go slow” approach on anything that will not yield immediate increases in cash flow.
Depending on the amount of debt and the priorities, measured against projections of revenue, the result might be substantial expense reductions, even staff cuts. The resulting organization and 2009-10 budgets should be focused on staying as lean as possible. I’d advise people to husband their cash. The mindset that grows a company is radically different than the mindset when it is shrinking. Banks are going to want debt to be reduced.


Investor Do you see strong companies poised for acquisitions?
Wagner The experience of the last three to five years is very similar to 1979-81 and 1996-98, when high prices and the availability of relatively inexpensive capital resulted in an explosion of drilling, development and acquisitions. In the aftermath of these “booms” we saw a significant contraction in activity, a wholesale reduction in valuations, and the ultimate liquidation of many companies and project structures.
Current conditions will result in many companies and asset bases going on the block, whether by design, by forming new alliances, or in a restructuring process that involves potentially painful negotiations with creditors.


Investor What’s your outlook for capital?
Wagner Capital will be very tight for the foreseeable future, except for the most attractive and lucrative of asset purchases and projects. But as the price outlook begins to stabilize, and restructuring of the most-leveraged or problematically structured projects begin to advance, new investors can come in and buy things at a discount. Some of the biggest fortunes in this business have been made coming out of the troughs. Wealth can be built dramatically in relatively short periods of time


Investor The 1980s bust lasted a long time. How long do you think this could last?
Wagner Oh, it’ll be a lot shorter this time. For one thing, you don’t have the big gas bubble of the ’80s. It lasted about a decade, from 1983 to 1993. Yes, you have the shales, but their decline curve is quite steep. With the cuts in drilling, I think you’ll see supply diminish faster than demand. It may take a year to work off.
The booms are a fantasy time where crazy people show up. Times like this are the most interesting, because it’s real life. When you sit down with people to figure out what to do, you form life-long friendships.

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