CBI: Oil and gas companies' capital supply and capital demand constrained in 2002

By Paula Dittrick
Senior Staff Writer
HOUSTON, Mar. 7 -- The supply of capital available to the oil and natural gas industry was constrained during 2002, but at the same time, oil and gas companies' demand for capital also was very low.

"Money has been unusually tight, but somewhat better times are ahead," said Scott W. Johnson, cofounder of Weisser, Johnson & Co. He expects to see both drilling levels and the number of acquisitions grow this year although both will remain below previous peak levels.

Speaking Thursday before a Financing Oil & Gas conference organized by the Woburn, Mass.-based Center for Business Intelligence, Johnson said extreme commodity price swings have made potential investors reluctant to commit money to oil and gas companies.

"Geopolitical events are influencing commodity prices. Economics are almost off the table," Johnson said in reference to the potential war in Iraq, the strike in Venezuela, and an uncertain economy.

Weisser, Johnson & Co., Houston and New York, is a financial adviser working for oil and gas companies seeking private financing. The firm has arranged financing ranging from $5 million to $400 million, although most deals are $10-50 million.

Capital markets
"Public markets are in turmoil and are unavailable to most," Johnson said of the capital supply. "Banks are fewer, and are generally cautious. Mezzanine (debt financing) nearly disappeared, but it is rebuilding. Large private equity dollars are available, but deal volumes are not yet filling the gap."

This year, he expects to see private equity deal volumes increase "moderately" while new providers of mezzanine debt finance will emerge.

Oil and gas companies also will see a return of financing arrangements for projects having low initial production, he forecast. These financings could involve volumetric production payments and a combination of mezzanine financing plus private equity.

"Demonstrating niche strength will remain key in a still-selective environment," Johnson said, adding that strong development projects already having some equity are the candidates most likely to attract mezzanine financing.

Independent producers used to rely heavily on mezzanine debt financing, but many sources of that type of financing have gone out of business, including Shell Capital Inc. and Aquila Energy Capital.

On Friday, the Charlotte, NC-based Duke Energy Corp. announced it was exiting the merchant finance business at its wholly owned subsidiary, Duke Capital Partners LLC, which provided debt and equity capital and financial advisory services to energy companies, including mezzanine financing for oil and gas companies.

The parent company expects to boost cash flows in 2003 and 2004 as Duke Capital Partners' portfolio of $350 million is sold or matures.

Duke Capital Partners was formed in 2000 and had offices in Charlotte and Houston. A news release said the company's lending portfolio was sound but that "the energy industry has changed tremendously. . .and the prospects for Duke Capital Partners were severely limited by Duke Energy's decision to focus its more-limited capital investments on its traditional business segments."

Project financing
Steven S. Greenwald, Credit Suisse First Boston's managing director, global energy and project finance group, said well-structured project financings could be arranged. In particular, pipeline expansion projects are securing financing, he said.

Greenwald helped arrange Kern River Gas Transmission Co.'s $875 million construction bank facility to finance 70% of the total cost of its proposed 2003 pipeline expansion project. The bank facility converted to a 15-year term loan that was syndicated to 31 lenders, and it was created with the intention of being refinanced in 2003.

Berkshire Hathaway Inc. unit MidAmerican Energy Holdings Co., Des Moines, Iowa, bought Kern River Gas Transmission from Tulsa-based Williams Cos. Inc. for $960 million in cash and debt. MidAmerican is continuing Kern River's scheduled expansions (Mar. 18, 2002, p. 43).

Meanwhile, total volumes of energy project financings declined 40% in 2002 compared with 2001, while oil and gas project financings declined 13%. The oil and gas industry worldwide in 2002 attracted $9 billion in project finance, with 65% of that total involving projects in North and South America, Greenwald said.

"Energy projects are likely to become more structured¿.Capital will always be available for well-structured oil and gas deals," he said, adding that capital providers are refocusing "on old school project finance skills such as risk allocation and financial modeling."

"The US power sector took the project financing curve way up in the 1990s, but now that has all but disappeared," Greenwald noted.
Contact Paula Dittrick at [email protected]