A year ago, when Clint Wetmore, managing director, and partners formed Houston-based private-investment firm Post Oak Energy Capital LP, he saw energy capital investments directed toward E&P acquisitions as the main strategy to fuel growth for independents. However, that has changed, he says.

"E&Ps can make money on acquisitions; we all know that. But today, land is king.

"We have been seeing more and more exploration-focused start-ups with exploration management teams looking for land and organic growth, as opposed to acquisition-based funding," he told attendees at a recent program sponsored by the Houston Energy Finance Group and IPAA.

"A year ago, the first thing we used to hear from capital seekers is how great their technical team is. They would say, 'Let us show you our seismic, our local capabilities and our reservoir engineering models.' Everyone was really focused on the technical side, which we still agree is terribly important. Now, however, the first thing we are hearing is, 'Look at our land position, at how many landmen we are going to employ,' so that has really been a noticeable new trend."

There is also a new phenomenon of shorter investment cycles. A year ago, almost every deal that came to the firm had a three- to five-year horizon, Wetmore said. Now most investment deals with the firm have a term cycle of 18 to 36 months. Although the return on investment on these is the same as that of the five-year deals, the shorter term is advantageous to Post Oak Energy Capital because it can recycle capital quicker, putting it into new deals. Deal structures are changing as well.

"When we started a year ago, everything that walked in our door was all about preferred stock. That's the kind of equity everyone was looking for. Lately, we've seen a number of seasoned companies making sizable contributions both on the cash side as well as the asset side, and asking for common-equity contributions," he said.

The players are changing. Due to some large mergers that have taken place lately, there are more management teams coming out with retirement packages and looking to create new ventures.

"We are seeing a natural migration of some of those management teams, the oil-finders and the deal-makers with 20 years' experience in the majors, coming in to create their own start-ups," said Wetmore. "They say it is their time now, so that is really feeding the pipeline."

The firm's pipeline is filling up with prospects and Wetmore says its opportunity set is as strong as hoped. "The most common theme in the investment sector is that we are all running about 110%. We have more deal flow than we can evaluate."

Meanwhile, lending rates are trending up. "When we've received commitments from commercial or investment banks recently, they have definite, explicit contingency language. Also, the interest rates have gone up, and lenders are requiring more equity. In general, what we are seeing is a minimum of 20% equity. That is a big shift on a percentage basis."

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