?The capital markets took a major turn during the latter half of 2008 as the subprime crisis came to fruition. The year started with the purchase of The Bear Stearns Cos. Inc. by JPMorgan Chase & Co., soon followed by the failure of other long-lasting financial institutions. These events have raised serious questions about whether E&Ps will be able to receive funding, the effects on existing plans and just how long the crisis will last.


“Large public deals, whether financings or acquisitions, are those most affected and most likely not to reappear anytime soon, except where a company’s balance sheet carries extraordinary cash,” says The Rodman Energy Group senior managing director Cameron Smith.


“Even smaller public deals will have to await the return of the hedge and mutual fund buyer, which, themselves, will not return until the retail investor regains confidence. Private equity will be least affected, but it will, first and foremost, be looking for growth investment opportunities, rather than the start-ups, which were its staple for the past three to four years.”


Smith sees credit remaining an issue throughout 2009, forcing private equity to overcapitalize companies and projects to get transactions closed. He believes there will be securing of debt and repatriating of equity once markets normalize.


“Private capital will flourish in 2009, but not at the expense of other capital firms. Private capital, because in the main it was cashed up before the crisis started, will be able to deploy that capital to assist others in distress or to carry through on projects that others cannot sustain.


“There will be instances in which private capital’s funders will default on funding calls, and the next round of raisings may be constrained by the market, but for those with capital to deploy, good times have arrived!”


E&Ps with more ambitious plans could face some brick walls in the credit crunch.


“Bank financings in excess of $300 million could prove to be problematic,” says Dan Steele, senior vice president and manager of the energy-lending group at Bank of Texas. “The bank-syndication market is very constrained. A limited number of banks in the energy space have capacity to commit capital for new deals. Senior secured lenders will tighten their underwriting criteria; all sectors of the energy industry will see more restrictive covenants.”


He adds that banks will shy away from highly leveraged transactions and any type of project financing will face challenges. Steele also feels that private-equity firms will benefit best during the current environment.


“Capital will be a precious commodity in 2009. The circumstances surrounding 2009 would seem to bode well for private-equity firms. And several private-equity firms are reported to have sizable amounts ready for investments. A possible challenge for equity firms would be a scarcity of management teams who are willing to undertake start-up risks in a depressed market.”


Unlike some who think the credit crisis will have a long echo, Guggenheim Partners managing director Tim Murray does not see the commercial banks’ credit problem lasting past midyear.


“I expect the commercial banks to perhaps be reengaged by June.

?The annual national bank examination process concludes in late spring. Following that process, each national bank knows how its portfolio of credits and capital ratios stand. After that process is concluded, the banks will either go back to the lending business, or start selling assets to generate liquidity and pare bad loans.”


Most commercial banks are still supporting existing clients, but few are providing any new loan capital, he says. As for institutions, that driving force in the market for the past few years is “definitely in the ditch.”
“It may take all of 2009 for the hedge funds and other institutions that lent and invested heavily in the oil and gas sector to sort out their portfolios. I don’t believe that process of turning over the portfolios will happen until the commercial banks start lending again.”


The credit market may force some E&Ps to have to sell assets or merge rather than stick it out until credit returns.


Murray says, “I expect some opportunistic mergers and acquisitions. Some targets simply have no choice but to surrender to their lender and/or be merged. The reserve-divestiture market is really tough; therefore, mergers may be a less painful way for lenders and investors to work out their more challenging situations.”

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