No longer a niche participant, Capital One has evolved into a major player in energy finance.
EDITOR'S NOTE: OGFJ recently visited with Capital One's energy group, which hired two new senior executives in August. Former Barclays banker Russ Johnson and Bob Mertensotto, who worked for JPMorgan Chase, will be in charge of Capital One's energy-banking office in Houston and report to Jim McBride, head of the energy-banking business within Capital One Securities, Inc. Two other banking executives, Scott Joyce of the Houston office and Pierre Conner from the New Orleans operation, joined the discussion. |
OIL & GAS FINANCIAL JOURNAL: Can you explain for our readers the significance of Capital One's recent (last month) hiring of Russ and Bob? Is this part of a reorganization or expansion of the energy-banking group?
JIM MCBRIDE: Don, these changes are all about growth and adding value for our clients. After Capital One acquired Hibernia Bank, our leadership, Mike Slocum, and Rob Stuart, recognized the significant growth opportunity in energy banking. In 2008, Capital One recruited me, Scott Joyce, and others to join its existing energy team and lead the growth of the business. We've had good success. We've significantly grown our client base, our capabilities and our revenues. We now have a team of 28 professionals delivering our lending and investment banking services.
We knew that the best way to sustain our growth was to recruit the best people in the business. By hiring Russ and Bob, we believe we've delivered an unequivocal message to our clients of our commitment to them and to the energy sector. We've hired two people we know and trust. We hired the best people with unquestioned skills and reputation, people with proven track records. Not only have we recruited to great bankers, we've hired two great people. We're confident Russ and Bob will help us continue to drive our business forward.
PIERRE CONNER: We have had great support from Capital One for our sales, research, and trading platform. We've built a great team, expanded our offerings and are ready to take it to the next level. We have grown our energy research coverage from approximately 60 names to 100 energy equities. In particular, we have added E&P research analysts and expanded our E&P coverage to 50 names. Recently we hired an experienced analyst with both buy side and sell side experience and a prior Wall Street Journal best on the street number one ranking. We will broaden and deepen our support of institutional equity investors in the space by adding research coverage for other energy sub-sectors. Our annual energy investor conference held in New Orleans in December has also grown. From 30 companies at our first conference, we now host more than 100, and we attract knowledgeable investors to the conference to meet these companies.
SCOTT JOYCE: In 2013 we've continued to drive growth, on par with the significant growth we've achieved over the past five years. We've added more than a dozen new clients this year. Our focus going forward will be to expand our capabilities so that we can deepen and broaden our existing relationships. We will also continue to selectively add new clients.
RUSS JOHNSON: I was attracted by the opportunity to join a team that had tremendous momentum with a strong commitment to continued growth with our energy clients. Capital One is clearly leading a charge to grow its presence in the energy sector and the fact that Jim, Bob, and I have worked together previously made for a unique opportunity to reconnect and drive the business forward.
BOB MERTENSOTTO: I have known Jim since the early ‘80s when we both started our banking careers. We have stayed in touch over the years since we both had developed a mutual respect for each other's abilities. When he joined Capital One in 2008, I have watched what Jim and Scott have accomplished since joining. They have transformed the business from a small niche player into a major player in the energy finance practice. I became increasingly more excited about what they have built as well as where the practice could continue to grow to as I did my diligence on the firm prior to joining. There is a strong commitment from the top of the house on down to evolve the practice into a top 5 energy finance practice.
OGFJ: Can each of you tell us a little about your background?
MCBRIDE: I got into the oil and gas business by working on water well drilling rigs when I was in high school. At Mississippi State, I majored in civil engineering, but earned money in the summer by working offshore as a roustabout. When I graduated from college , I was hired by Mobil Oil as a petroleum engineer because of my background. I spent five years working in the Gulf of Mexico and in Mobil Bay as a completions engineer, and later, a reservoir engineer. I joined the old Texas Commerce Bank in 1982, originally as a petroleum engineer, then eventually moved to the banking side of the business and have been in banking since then. Five years ago I joined Capital One along with Scott Joyce and others, to build and grow the business here. At Texas Commerce, I had the chance to work closely with Bob Mertensotto, and we later recruited Russ Johnson from our credit training program. So all together, I have over 30 years of experience, many of them working with the group of people you're meeting with today.
JOHNSON: I have about 20 years in the business. As Jim said, I joined him and Bob at the old Texas Commerce Bank, which was actually Chemical Bank's energy group at the time, so that's where we all connected. I graduated from Texas A&M with a degree in finance and got into banking in the early ‘90s. Spent a few years working with Jim, then he left and Bob and I continued working together for 11years at JPMorgan. I left in 2004 and spent about 9 or 10 years at Deutsche Bank and Barclays - I joined Capital One from Barclays where I spent the last five years in the energy investment banking group. So, my career has really all been in energy banking.
JOYCE: I'm a mechanical engineering graduate of Texas A&M and worked for five years in the chemical industry. While working in California, I earned an MBA from the University of California-Berkeley. In 2000 I finished my MBA and started my energy-banking career that summer at Bank of America here in Houston. I worked there for four years then went to work for Jim McBride at The Royal Bank of Scotland a year after he was hired to build out the E&P business there. I worked there for four years and then came along with him to Capital One a little over five years ago.
CONNER: I, too, started in the energy industry. I have an engineering degree and a business degree from Tulane. I started with Exxon in New Orleans and worked in a number of different areas for the company in different functions and drilled wells from the North Slope of Alaska to the Gulf of Mexico and offshore California. I came into the securities business in 1999 with the predecessor of Capital One Securities doing equity research and now manage the sales research and trading effort for Capital One Securities. I've enjoyed the transition and building the team, and it's great to be a part of the effort.
MERTENSOTTO: I've been in the oil and gas finance business for 32 years. My entire career basically has been with one employer prior to joining the Capital One team – JPMorgan. I started my banking career with Texas Commerce Bank, a predecessor bank to JPMorgan, in the early ‘80s. Over the years, I eventually found my way working for JPMorgan which was seven or eight mergers later as the financial industry began to consolidate. My experience has been predominately on the reserve-based lending side. However, I've touched all different facets of the energy sector from upstream, to midstream, to service, as well as the integrated companies. For the past seven to eight years I was in JPMorgan's leveraged finance practice where I worked with clients arranging syndicated credit facilities as well as originating high-yield debt for them. I grew up in Minnesota, graduated from The University of Notre Dame with a BBA in finance in 1981, moved to Houston and went to work for Texas Commerce Bank.
OGFJ: Are you the only one here based in New Orleans?
CONNER: Yes. Investment banking and lending are focused in Houston, but our sales, trading, and research effort is based in New Orleans with a few analysts in other locations.
OGFJ: How many people do you have in the energy-banking group at Capital One?
MCBRIDE: We have 28 professionals in our energy-banking effort and the majority of our people are located here in Houston where our energy-banking business is headquartered. As Pierre mentioned, he leads our sales, research, and trading effort from the office in New Orleans.
OGFJ: I've heard a lot of people, including some of your competitors, say good things about Capital One, so you are having an impact on the marketplace. Who do you consider the major players in this industry sector and where does Capital One rank?
MCBRIDE: Don, we want to be viewed by our clients as a top 5 US energy bank. We'll let our clients determine how we're ranked in the market.
OGFJ: What is the single hottest area of activity in energy-banking today?
MCBRIDE: The development of the resource plays and the infrastructure necessary to bring the production to market.
OGFJ: The oil and gas business seems to go through phases with lots of M&A activity for a few years, followed by a lull in activity. How would you characterize where we are today – a slow period?
JOHNSON: There was an overall slowdown in energy in the second quarter of 2013 compared to the same period in 2012 but the activity was sector dependent. The upstream business was slower during this period and there was certainly less corporate acquisition activity. However, we are seeing momentum around upstream asset deals of late and there continues to be healthy activity in the midstream sector along with oilfield services this year.
CONNER: Our research team does think M&A activity will pick up as most of the land acquisition activity in the major basins and plays are for the most part over. Some places will take scale to develop cost efficiently and companies with lower cost of capital will be able to create value by acceleration of prospects from companies more capital constrained.
OGFJ: Do you think we'll see any major corporate acquisitions on the level of Exxon's purchase of XTO Energy a few years ago? How likely is it that we could see a merger of a couple of super independents that could result in the creation of a new super-major?
JOHNSON: While we would expect to continue to see consolidation in the sector, the large independents and majors have long time horizons when it comes to rationales for entertaining large corporate transactions. The example of ExxonMobil acquiring XTO Energy is a good example of a company's long-term perspective of and positioning within the industry – in that case the North American natural gas market. The value proposition needs to align with the long-term view of a company's corporate strategy.
OGFJ: Some people are calling shale development more of a manufacturing process today, which removes a lot of the drilling risk that traditionally has been a factor in oil and gas exploration. Do you agree with this characterization? If so, how does it affect capital availability for companies drilling in shale plays?
MERTENSOTTO: I do agree. In the early cycle of developing the various shale plays it is definitely more equity type risk and more challenging to finance. As the plays become more proven and evolve, they become lower risk and shift more to a manufacturing process. At that point, the avenues increase significantly for utilizing leverage at attractive cost of capital from traditional bank financing, to high yield or some sort of low cost development project financing.
OGFJ: Private equity people tell us that they have raised billions of dollars for investment, but that they are cautious about investing it unless they are confident they have the right management teams with a proven track record. From your standpoint, what do you look for when considering lending capital to upstream companies, whether in shale or offshore or elsewhere?
JOHNSON: Regardless of the assets, we place a clear importance on the management teams running those assets. This is a fundamental tenet of how we want to align ourselves – with strong management teams who have operational knowledge and have been disciplined and successful throughout industry ups and downs.
OGFJ: I'm sure that market conditions, pricing forecasts, and the general economy are all things you take a hard look at before committing to lend large amounts of capital. Can you give us an idea as to how much weight you put on each of these areas, including the management team and its track record?
MERTENSOTTO: Clearly, market conditions, pricing decks, the general economy and the asset base are all important factors to review prior to extending any form of capital. However, the management team and their track record do weigh in very heavily in my opinion. It is the management team and their ability to guide the ship as well to execute the plan is what I always count on. Further, we want to extend capital to teams that know how to create value as well as to run with a prudent capital structure. There is an old saying; a good management team can create value from a challenging asset base and a poor management team can destroy value on even a good asset.
OGFJ: What can you tell us about the various business segments within Capital One's energy-banking group? Is energy trading or commodities trading an important component of your business?
MCBRIDE: In order to be viewed as a Top 5 US energy bank, we believe it is imperative that we have a commodity derivative capability. We're recently hired Chris Swanson to build and lead that business for us.
OGFJ: Can you talk a little about the kind of research you do and what you do with the information?
CONNER: We have 21 professionals in sales research and trading with our operations run out of New Orleans. We cover more than 100 Energy equities currently and we are known for the quality of our analytics, stock picking and depth of industry and company knowledge. In fact, our sales team has been recognized externally as a top five energy equity sales force, our OFS research team has been lauded for earnings estimate accuracy and our E&P team's "Focus List" has materially outperformed the index since inception and on a YTD basis.
Our research supports over 500 institutional energy equity investors in the US and overseas that we believe manage over 90% of institutionally managed energy dollars. Our investor liaison team also helps match up specific company investment opportunities to our deep investor relationships in a number of ways, including our annual energy investor conference in December in New Orleans of each year where we will have hundreds of energy investors and company representatives in attendance.
OGFJ: How hot is the midstream sector right now? There seems to be more infrastructure building in midstream than we've had in many years. From a bank's perspective, is midstream lending generally regarded as safer than upstream lending?
JOYCE: As the various shale plays in the US mature over the next few years, significant investment will be required to develop and expend infrastructure in these areas. Midstream companies will continue to finance this growth with bank debt as well as public and private debt and equity. Companies with solid management teams, good assets, and appropriate contract structures should have very good access to capital over the next several years, and we intend to be a significant provider and arranger of that capital.
OGFJ: Is your focus mainly on the US and North America?
MCBRIDE: We're focused on the lower 48. There's plenty of business opportunity there for us.
OGFJ: How much of Capital One's energy-banking business is focused on the oil and gas industry – compared with, say, power generation, utilities, renewable energy, coal, etc.?
MCBRIDE: We're primarily focused on the E&P sector, the midstream sector and the oil field service sector. As we grow our business, we'll continue to examine expanding into other sectors that make sense to us. For instance, we will expand into utility scale alternative energy and expect to announce a new head of that business later this month.
OGFJ: How big a factor is the regulatory process in your business decisions? Do you consider this a major risk factor? For example, if the EPA or another federal agency were to take over more responsibility from the states in regulating hydraulic fracturing.
MCBRIDE: Don, the best way I know to answer that question is to say the American people elect our government; the government makes the rules; and we try to always act responsibly and play by the rules. And we expect our clients to act responsibly and to play by the rules.
OGFJ: What's the next big shale play in the US – the Tuscaloosa Shale in Louisiana or something else?
MCBRIDE: We're extremely fortunate to work with a number of entrepreneurial companies and people. They are always generating new ideas and creating value. We work closely with them and maintain the confidential nature of their work and their competitive advantage.
OGFJ: Final question: What do you see as the likely timetable for LNG exports from the US and Canada really taking off? How big a factor is this for gas producers – that is, will domestic gas prices increase significantly once we start exporting it in the form of LNG to consumers in Asia and Europe?
CONNER: Our energy infrastructure analyst follows this quite closely and it is of great interest to investors and our covered companies as well of course. There are now four LNG trains with DOE non-FTA export approval currently with over 20 in the queue. We expect first LNG in late 2015 but when it really "takes off" is a question of continued permitting, financing and contracting pace. Most observers believe that we can begin the export process without a material rise in prices, but if we get a confluence of exports, GDP growth domestically, increased petrochemical demand and increased use in transportation, particularly long haul, there should be a corresponding support for natural gas prices. Canadian LNG exports are also moving forward, but our analyst feels there is a contracting price advantage by the lower-48 producers currently offsetting Canada's proximity to markets and potentially quicker permitting process.
MCBRIDE: LNG exports can serve to support natural gas prices which can further stimulate the development of natural gas development in this country. The responsible development of more domestic energy is a good thing for the US.
OGFJ: Thank you all for taking the time to talk with us.