Back to boutique

Clockwise: Scott Baxter, Jon Hughes, Tom Petrie, Andy Rapp, and Mike Bock. All photos courtesy of Petrie Partners.

OIL & GAS FINANCIAL JOURNAL: Could each of you tell our readers a little about your background?

TOM PETRIE: I've been focused on energy for 42 years now, about half of that time as an analyst and the second half of my career as a banker. During my time as a research analyst at First Boston, Institutional Investor rated me No. 1 in the E&P sector for eight consecutive years. The publication was very oriented toward what was happening in the sector in the 1970s and '80s. In the '90s, I had the great adventure of helping build Petrie Parkman & Co., our previous boutique investment bank (OGFJ, Nov. 2005, p. 24). That was an unusual concept at that time. Jon Hughes and I were both at First Boston and Petrie Parkman and have worked together for 27 years now.

JON HUGHES: I'm a petroleum engineer by training, but I've been doing oil and gas mergers and acquisitions since 1986, initially at First Boston and then at Petrie Parkman. At the time we sold Petrie Parkman to Merrill Lynch, my job was head of investment banking. I worked for several years at Bank of America Merrill Lynch and that was a good experience, but I was interested in getting back to the "boutique" format, working with partners I know and trust and really having a client-first focus.

ANDY RAPP: I started my career in 1999 working with Petrie Parkman in Houston and early on gravitated toward working on mergers. I moved to Denver in 2005 to work more closely with Jon and Tom here and with the sale became a banker at Merrill Lynch. I left BofAMerrill at roughly the same time as Jon to found this incarnation of our boutique investment bank focused on the oil and gas industry.

MIKE BOCK: Out of college, I started with Lehman Brothers in investment banking in New York in 1987. After my two years of indentured servitude there, I returned to the Denver area where I was involved in energy – in project development – for a while with my father. I became aware of Petrie Parkman, which was just building a corporate finance group at the time and I joined that group. By the time we merged into Merrill, I was running the corporate finance group, and our focus was both public and private, mostly equity raises for energy companies. We had a pretty good market share for both IPOs and secondary offerings – and we still had a private placement business that was pretty robust. Ultimately, Andy and Jon and I decided it would be a good idea to get the band back together. So here we are.

SCOTT BAXTER: I've been in the energy investment banking industry for 25 years, focused on corporate mergers and acquisitions. The bulk of my career was at Salomon Brothers, up through managing director there, and then I was Head of "Americas" for JP Morgan Chase's global energy investment banking group. In addition, I had my own firm, which was bought out by Houlihan Lokey, and I headed their energy group for several years. Then I got my company back, and that is what I was doing before joining Petrie Partners to open this firm's Houston office.

OGFJ: Thank you all for that background. Tom, I'm sure you had a lot of options when you left BOA Merrill Lynch. After your years with Petrie Parkman, why did you choose to become involved in another boutique investment bank? Didn't you have a sense of deja-vu about this?

PETRIE: [Laughs] The answer is yes to the latter question. But all my thoughts were positive. Building Petrie Parkman was a 17-year adventure, and it was great. It was right for the times in terms of the lines of business and the focus we had then. I was drawn to this new firm because of the opportunity to work with many of the same great people we had before and in my view, a role has clearly evolved for the boutique advisor that is not driven by market-share like many larger banks and advisory firms. We are committed to the idea that a close client relationship built on trust is paramount and we have a firm where confidentiality and the ability to focus are crucial. At this stage of my career, I want to devote my time to working with clients and thinking about industry trends and what they mean for client strategies, and then helping the clients execute on those strategies. Our current format is really the most appropriate for that. I was blessed with other options, as you alluded to, and some of them were very attractive and fairly high profile, but this is the one that fit me best. Others here agreed to step into the managerial roles, so it allows me to focus on client relationships and client strategies. That made it a really compelling proposition for me.

OGFJ: Can you explain that format a little and tell our readers what Petrie Partners does? Do you lend money, or are you mainly an advisory firm? What areas do you advise on?

"In larger firms, the most senior guy's job is just to originate engagements. In our firm, it's to execute the deal as well." — Jon Hughes

HUGHES: Don, in some ways Petrie Partners is a new organization, but in other respects it is more of a reunion. We had 17 years in the boutique format to try things, learn lessons, experiment, and find what works best for our clients and for us. So we are not your traditional start-up. We are 100% owned by the employees, 100% independent and not affiliated with any other firm. That was one of the important decisions we made early on and we intend to keep it that way.

In terms of lines of business, our focus is on transaction-oriented investment banking. We basically have four lines of business. Three are strictly advisory and one is capital-raising. The first three are: mergers and acquisitions, divestitures, strategic advisory assignments. On the capital-raising side, it's the private placement business. We help companies and individuals raise money outside the public markets. There are a few things that we had done previously at Petrie Parkman that we won't be doing this time. For example, we are not in the research publishing business, nor do we have a sales and trading operation. We are really focused on strategic advisory to senior managements and boards of directors.

PETRIE: Let me add a little to what Jon said. That [research and analysis] is a very competitive business, and the margins are quite squeezed. Also, I would say there is already an ample supply of research in the oil and gas space. As far as trading goes, the overall challenge, the regulatory burden and such, is probably best left to those that have the scale to deal with it. One of the things we do have at Petrie Partners is a deep reservoir of real intellectual capital, knowledge of the cycles and of the drivers and so on of the business. So we know how to access and how to implement the conclusions that come out of that segment without being a competing provider of research to the broad market.

HUGHES: I would say that at Petrie Partners the research we do and our strategic thinking is for the direct benefit of our clients, not for the broad public investing market.

OGFJ: How then do you differ from other energy advisory firms? Are all your clients in the oil and gas business?

BOCK: I would describe us an "energy focused and oil and gas-centric." We're not just upstream though. We've done midstream advisories, and we'd look at a refinery project and that sort of thing. However, it's all going to be oil and gas-related – not power-oriented or renewable-focused.

HUGHES: To answer the first part of your question, there are several attributes that make our firm unique. One is our level of experience. I'm sitting here at a table with four partners and we collectively have more than 125 years of energy investment banking experience. Another facet that differentiates us is that we operate as a true partnership, we all truly like, respect, and trust one another and so we function differently from other firms. We share resources and insights. Nobody's got a guaranteed compensation package. We also have an independence that most firms don't have because of other businesses they're in such as lending or private equity or as a result of their ownership structures. Finally, I would note that each of us actually works on executing our transactions. Bringing that senior experience to bear for our clients is a major distinction for our firm. In larger firms, the most senior guy's job is just to originate engagements. In our firm, it's to execute the deal as well. When clients engage us, they know the people actually working on the project have been doing this for a long time.

"Divestitures are a focus area for us. It's a great business and really keeps us up to speed with the pulse of the market."— Andy Rapp

RAPP: It's counterproductive to your client's interest if you're operating in a silo and not sharing information and insights with your colleagues. Here, we don't have silos, which is vital to the way we conduct business.

PETRIE: In the lines of business the guys just spoke to, we view ourselves as the competitive alternative to the big Wall Street banks. There obviously will be certain situations where the client will need to access the wider range of services offered by the New York-based firms, and in many of those cases we are complementary to what they're getting from those other firms. Often the client wants a second opinion and comes to us. They appreciate the fact that at Petrie Partners the senior partners here will actually think about and work on their transaction, which is a competitive advantage for us.

OGFJ: What kind of projects are you seeking?

HUGHES: Good question. We are seeking projects in the four lines of business that we mentioned earlier. We have been successfully executing engagements in each of those focus areas. For example, we are advising on an announced upstream merger where at the moment the SEC is reviewing the proxy. We also represented the special committee of Venoco when that company went private. So that's a couple of publicly disclosed M&A projects we've worked on. With respect to strategic advisory, these are obviously sensitive. We have a couple of ongoing advisory projects in which we're working very closely with senior managements and the boards involving the most strategic and critical types of decisions companies face but due to confidentiality, we can't really discuss them.

RAPP: Divestitures are another focus area for us. It's great business and really keeps us up to speed with the pulse of the market. To date, we've closed transactions in most of the major basins in North America, including Williston, Niobrara, and Eagle Ford. As an example, in the Piceance Basin, we worked with PDC Energy on the sale of their Colorado gas properties, which had become a non-core part of their portfolio as a result of their success in the Niobrara and Utica plays. They decided to divest their Piceance properties and use the proceeds to accelerate development in their two core areas. We feel very fortunate with the activity levels and scope of what we've been working on.

BOCK: In the private placement space, the financing space, we try to bring together top-notch management teams and capital providers. There's really been an explosion in the business of late due in no small part to the technology advances developing the shale assets. As you know, it was the independent producers who led the charge on this. There are a number of management teams who have been on the frontier of that and are very backable teams that attract capital. And there's quite a bit of capital in the market for energy investment. Our job is to find the best teams and the best capital providers and match them up. For example, in a recent transaction we helped a very quiet private company here in Denver who had been pretty much doing everything 100% and hadn't taken outside capital previously, team up with one of the largest insurance companies in the country. We knew the senior management and looked at their returns, historically, which were fantastic. So we went out into the broad market and were able to raise some capital for them to conduct a horizontal drilling program on a substantial acreage position in Kansas.

"In the area of fairness options, which overlaps our M&A and strategic advisory business lines, our role as an independent advisor is really critical"— Scott Baxter

BAXTER: In the area of fairness opinions, which overlaps our M&A and strategic advisory business lines, our role as an independent advisor is really critical. We don't have conflicting lines of business, so we can come into a situation and truly be the independent voice to the board on fairness. We've recently executed three fairness opinions, and we've got a couple more that we're looking at. Here we go much broader into the sector in terms of upstream, midstream and downstream. This is an active area for us.

OGFJ: Let's shift a bit to the industry itself. I'd like to hear your thoughts about the current state of the oil and gas business in North America, the so-called "Shale Revolution," and the impact the dramatic increase in production it is having on everyone.

PETRIE: It's an amazing time. One of the last major deals we made at Petrie Parkman, prior to becoming part of Merrill Lynch, was sort of a precursor to what was to come. It was the sale of privately-held Chief Oil & Gas's assets in the Barnett Shale in the Fort Worth Basin. The nature and scale of that deal made it sort of a wake-up call for the industry. Within about nine months, there were 12 different shale plays – mostly gas plays at that point – that were being actively pursued by the industry. Not all of them were successful, but fully half of them did work. Suddenly we saw a transformation in the supply elasticity expectations of the industry for producing gas. This has enabled the US to morph from a country that was looking to import gas to meet domestic demand to one in which we are currently constructing export terminals to sell US gas abroad. That's a pretty big macro-trend – probably one of the most exciting ones going on in terms of staying power over one, two, three, maybe four decades.

There's another trend going on that's worth mentioning. As we sit here today, the spread between Brent crude and WTI is down to about $2 on the spot market. Most of the last several years, the spread has been between $15 and $25 with Brent being the higher price. That was a function of the supply elasticity that came after the recognition that unconventional gas could be developed with horizontal wells and multi-stage fracking. It wasn't very long before the industry decided to use the same techniques to develop oil and liquids-rich plays. This was a transformative event in the industry.

RAPP: With regard to US shale, we're looking at a transition where the land rush is largely over. As a result, we're moving up the food chain to a full development mode for those who hold the de-risked land in six or eight of the major plays – oil and gas. That requires a tremendous amount of financial and human resources as well as a different mindset and is an area where we all are involved in thinking through the implications of this with many of our clients.

OGFJ: What are some of the risks that shale developers and investors need to take into account – price risk, regulatory risk, etc.? Are you concerned about the possibility of federal regulation of hydraulic fracturing?

PETRIE: That's a great question and one we think about a lot. All the categories you mention are factors, but let me try to prioritize a bit. First, let's not forget that these new developments, as exciting as they are, are capital intensive. Development and operating costs can be significant. As a result of that, these projects are very price sensitive. It's important to know the price range that supports continued development and the point at which such development becomes marginal. So price risk is a big consideration, and this includes keeping an eye on the global economy and the worldwide demand for oil. We are not undersupplied with oil today. No one is talking about peak oil anymore. If Iraq gets back in the oil market in a major way, they could begin producing as much as 6 to 8 million barrels of oil per day. So production level tensions among other major oil-producing countries have an impact on oil development here in the US.

Risk is a real issue. It hasn't gone away. The inclination for more and more regulation seems imbedded in our governmental mindset right now and maybe to some degree in our societal mindset. I'm currently working on a book that speaks to this, but policymakers need to decide what they're going to regulate and what they're not going to regulate and how much confidence they have in the workings of the marketplace to assure an orderly and effective development of future supply.

HUGHES: We live in an era of empowered regulators. They could potentially take short-sighted actions on either the state or federal level that could diminish the many potential benefits of the combination of horizontal drilling and fracking. For both the industry and our country, we hope that cooler heads prevail and that policies aren't driven by the most vocal anti-industry crusaders out there.

PETRIE: Jon makes a great point that there are lots of things to worry about from federal regulators, including new EPA rules and the Department of the Interior's approach to licensing. However, and maybe I'm an optimist, I have been somewhat encouraged that this administration is beginning to recognize the need for a more constructive energy policy. Ernie Moniz, the newly appointed Secretary of Energy, is a fresh voice of knowledge in this arena. Also the attitude toward embracing the export of natural gas, albeit on a case-by-case basis, is encouraging.

OGFJ: As you have alluded to several times, this is a capital-intensive business. Where will the capital come from to develop our supply of energy now and into the future?

BOCK: With the magnitude of capital required, funding will come from myriad sources. Besides the public capital markets, capital is first going to come from the traditional energy private equity sources. Everyone seems to want to be in that business and there has been a proliferation of these funds in the last decade. They have evolved to address industry changes, including the higher cost of doing business and longer cycle times from creation of the business until monetizing it. And, with success, they have grown much larger and scaled up to address this change in the business. First Reserve used to manage a few hundred million dollars and today I think it's more than $20 billion; Encap's last fund alone was over $5 billion. Another source is very large leveraged buyout funds like KKR and Apollo. They have seen the enormous opportunities in energy, and they have set up groups specifically to address investing in those areas. There are outside investors, including Asian companies and sovereign wealth funds that are interested in investing in hard assets with minimal risk in North America. I think these categories of groups are going to be the primary external sources of capital for our industry, particularly in the earlier stages of development.

At a certain point these efforts can become self-funding. The economics that come with flush cash flow from tremendously productive wells with $100 oil means that as your project matures, you can pay a large part of your costs out of cash flow.

RAPP: At these kinds of cash-flow levels, the source of capital is basically the U.S. consumer who is paying $4 a gallon at the gas pump and high prices for heating oil and so forth. In addition, as these assets become more mature, traditional bank lending will become a meaningful source of capital. I would also say that throughout the lives of these projects, corporate M&A and asset divestiture transactions can be a source of funding for companies that need capital for further development or to accelerate development.

OGFJ: Tom, you mentioned writing a book. Can you give us a few details?

PETRIE: The idea of doing a book has been on my mind for some time. I've often thought – what an exciting time we are living in and are witness to, from the frustrating aspects of regulatory business that happened in the 1970s, the fascinating consolidation of the '80s, the '90s with the invasion of Kuwait, and then ultimately the Second Gulf War. I decided to look over some of the things I had learned and distill those experiences. For instance, what are some of the lessons that are there for us as we think about the transforming energy sector moving forward? So what I tried to do in this book is pull together something that is partially autobiographical but more importantly captures vignettes from various experiences over those four decades that speak to broader lessons and implications for the US as a country, while thinking about its energy future. The book is now at the publisher and will be out around the end of the year.

OGFJ: I'm looking forward to reading it, Tom. Thank you all for taking time out of your schedules to talk with us.