Finding a lending niche is the key to staying one step ahead of the competition and commodity-price fluctuations, according to some of the energy lenders at the recent Summer NAPE in Houston.

A representative of one Texas-based bank said its energy-lending business is still booming, thanks to its focus on smaller, independent E&P companies.

"We do loans as small as $50,000 and go up to around $7 million. Competition in our space isn't as rough because of the kinds of financings we do. It isn't until a client is looking for loans that are larger than $10 million that it becomes more challenging for us to compete."

Clients want funding to always be available in case a great project comes along, and this hasn't changed in the face of fluctuating oil and gas prices, the banker added. "Those high prices are good for our customers, which in turn is good for us. The changes in natural gas pricing haven't affected the number of energy financings we do."

Concord, California-based Harwood Capital executives aren't experiencing any slowdown in placing capital, either. The firm specializes in early-stage venture capital from $50,000 to $20 million, depending on the project, said Tom Swaney, president. Harwood was formed in 1990 to finance and manage oil and gas projects in the Lower 48 and India, Papua New Guinea, Fiji and China.

Swaney said geologists often approach Harwood with project plans, and the firm provides the capital to get the seismic and drilling under way. Unlike most traditional banks and mezzanine lenders, Harwood will lend on exploration ideas.

Swaney said, "We lend in smaller amounts, but because it's early-stage capital, the risks are higher. I've been told that we're filling a pretty unique lending niche for the industry. Because of this, competition isn't affecting us as much as it's probably affecting others."

Hybrid lender and working-interest partner Patriot Exploration Co. Inc., Houston, uses a financing structure that provides low-cost capital to drill proven undeveloped reserves. In return for the tax benefits associated with drilling, the firm provides operators with a large back-in interest after payout, an opportunity to keep 100% ownership and balance-sheet leverage, without the high cost of mezzanine financing. Patriot also takes second position to senior lenders until the preferred payout.

"We will never dilute anybody through our financing," said Jonathan Feldman, principal and chief executive. "We'll partner up and back ideas. We'll also be a working-interest partner. We have tremendous flexibility."

Patriot's energy investments range between $5- and $15 million to date.

"There is really plenty of capital going around right now," Feldman said. "But some providers are going to end up getting burned, as capital pricing is getting out of sync with risks. The influx of capital is great for the industry, but eventually, capital providers aren't going to keep getting compensated for the risks they'll have to take. Returns will start going down unless commodity pricing keeps going up."

This year's midyear NAPE drew more than 5,000 attendees, and exhibitors booked more than 400 booths.