Remember the days when banks were just that-banks? The old regulatory walls separating commercial banks from investment banks have crumbled. Now, when an oil and gas producer goes shopping for credit, a banker usually offers a lot more-from M&A advisory services to private placements, to underwriting public equity and debt deals. Why? Lenders-more mindful than ever of their own returns to shareholders-want to go beyond simply putting their balance sheets at risk for reserve-based loans. Says one banker bluntly, "If all an oil and gas company wants is my money-and no other service-that's not for me." This penchant to be financial "one-stop-shopping" malls is particularly prevalent among major money-center lenders. That's not surprising. In many cases, they've not only gobbled up other leading energy lenders, but also bulge-bracket and regional investment banks. Increasingly they tend to view lending as a springboard for more lucrative, fee-generating transactions. Make no mistake. Such a mindset isn't necessarily a bad thing for would-be borrowers. There's a strong case to be made for having all of one's financing needs resolved under one roof. Also, the more a banker gets to know a company as it climbs the capital ladder, the more responsive it can become in matching its financial services to that customer's strategic goals as it grows. So, with this perspective in mind, just what is the state of energy lending today among money-center banks? The answer: much rosier than it was this time last year. "In first-quarter 1999, we saw anemic oil and gas loan volume-$8 billion-due to low commodity prices," says Jim Davis, president of New York-based Loan Pricing Corp. (LPC), which collects, analyzes and publishes loan data. "That volume essentially doubled in the subsequent quarters of 1999, despite a pullback in oil and gas lending sentiment late in the year." Explains LPC analyst Meredith Coffey, "In the third and fourth quarters of 1999, there was a significant pullback in the high-yield bond market, and that made it more difficult for other capital markets-including the loan market-to continue their upward momentum." Among the 44 banks that LPC tracks as lenders to the oil and gas industry, overall loan volume for 1999 was only $59.2 billion versus $83.9 billion the prior year and almost $70 billion in 1997. Happily, the lending outlook for 2000 is different. Despite their concerns about the sustainability of high crude prices-recently more than $30 per barrel-bankers focusing on the oil and gas industry are optimistic about loan volume this year, says Davis. "They cite increased cash flows and earnings being reported by operators, which enable funding of future oil and gas projects. This, in turn, creates the demand for corporate finance, such as bank loans." Bankers are also heartened by the overhang of M&A opportunities created by the recent spate of giant mergers in the industry, says Davis. "They expect a lot of divestitures to occur this year, which should generate more loan volume." This doesn't mean that their optimism is approaching euphoria, cautions Coffey. "In first-quarter 1999, when commodity price decks were redetermined by banks, many oil and gas producers had outstandings far greater than what their new borrowing bases supported. That memory is still fresh in the minds of lenders. Loan agreements are now stricter." Notwithstanding, Chase Manhattan Corp., the top U.S. oil and gas lender for 1999, is sanguine about 2000 transaction volume. "This year has started off much stronger than last because we're in a much healthier commodity-price environment," says Todd Maclin, group executive for Chase's global oil and gas group in New York. "Over the course of 2000, we expect crude prices to average above the mid-$20s, with natural gas prices averaging above $2.50. When we couple this outlook with the fact that many properties are now coming on the market as oil companies try to rationalize assets, we anticipate a lot more oil and gas financing opportunities-as well as M&A advisory work-than in 1999." According to LPC, Chase, with assets of $377 billion, last year agented more than $33.4 billion worth of oil and gas loans. Meanwhile, the bank's individual commitments to the industry at year-end totaled $15.1 billion; its outstandings, nearly $8.3 billion. "When oil and gas companies come to us for credit, they're looking not so much for balance-sheet support, as our expertise in structuring and syndicating quickly and efficiently large transactions that appeal to a very broad base of lenders and investors," says Maclin. In sizing up an upstream borrower, Chase pays particular attention to management's level of sophistication, the nature of its asset base-whether it has long- or short-lived reserves-and how much leverage that asset base can support, says Tod Benton, managing director in Chase's global syndicated finance group in Houston. "A longer-lived asset base in the Rockies or in the Appalachians, where an operator doesn't have to constantly replace production as in the Gulf of Mexico, can inherently have more leverage." Pricing on a three- to five-year loan for a non-investment-grade borrower can range from 100 to 350 basis points over Libor (London Interbank Offered Rate), depending on a company's size and the leverage being put on its asset base, says Michael McGovern, managing director in Chase's global syndicated finance group in New York. For investment-grade borrowers, which tend to use loan commitments as a 364-day-term backstop to their commercial paper or as a short-term bridge to capital markets transactions, pricing ranges from 20 to 100 basis points. Indicative of Chase's global reach are two recent credits it arranged for Triton Energy Ltd., a Dallas operator with oil and gas assets in Colombia, Equatorial Guinea, Thailand and Malaysia. One allowed Triton late last year to bid on the acquisition of about $700 million of oil and gas properties in Argentina. Triton lost the bid. Nonetheless, the credit was in place. Subsequently, the company made a huge oil find off Equitorial Guinea and came back to Chase for financing to drill more wells there, as well as to continue drilling in Colombia. Earlier this year, the banker lead-arranged and syndicated a three-year, $150-million facility, priced at the high end of the range for non-investment-grade companies. "These transactions were somewhat atypical for the bank market," says Benton. "Most of the company's assets are in Latin America, Asia and West Africa. Latin America is a difficult market to lend into right now. Also, we had to get other lenders comfortable with the fact that although West Africa is a third-world region, it has very prolific reservoirs and relatively low political risk." Closer to home, Chase is advising Houston's El Paso Energy on its purchase from Pacific Gas & Electric of about $850 million of pipeline, gathering and gas processing assets in South Texas. "As El Paso's lead bank, we're also involved in working with the company on financing that acquisition," says Maclin. "So this is more indicative of the one-stop-shopping trend in banking you're seeing today." On the oilfield service side, Chase is arranging the third in a series of synthetic leases for Hanover Compressor Co., a leading Houston-based lessor of compression equipment. The first two synthetic-lease financings syndicated by Chase last year raised $350 million; the latest will raise another $200 million. "Through these synthetic leases, Hanover raises capital by selling its compression equipment to a trust, then leases that equipment back from the trust," says McGovern. "In this manner, the company is able to monetize its assets and still provide those assets to its clients to generate cash flows." Synthetic-lease financing is also a good earnings-per-share management tool for Hanover. "By letting the trust hold its assets, the company doesn't have to take the depreciation expense associated with the asset, which would negatively impact earnings." Adds Maclin, "To us, financial engineering is just as important as having expertise in petroleum engineering." Much of this same view is held by Bank of America, the second-biggest U.S. oil and gas lender last year. With assets of $635 billion, it agented in 1999 nearly $33.4 billion worth of oil and gas credits. Meanwhile, its individual commitments to the oil and gas sector totaled an impressive $36 billion. Says Charles S. (Chad) Weiss, New York-based managing director and head of the bank's energy and power group, "We're trying to bring complete, broad-based financial support to our oil and gas clients. Clearly, that includes lending money, but it also includes raising equity or assisting with M&A advisory. All these pieces are key to our business strategy. And we apply that strategy across the entire spectrum of publicly traded oil and gas companies." Weiss notes that the bank is active on both the credit and capital markets sides not only with the likes of Exxon Mobil Corp. and BP Amoco, but also with independent companies like Cabot Oil & Gas Corp., Basin Exploration and Spinnaker Exploration Co. James M. Mercurio, Houston-based managing director in Banc of America Securities' natural resources group, elaborates on the bank's approach to lending. "In large part, our role is to arrange financing. Certainly, we'll use our own capital for credit facilities, but we essentially package those credits and syndicate them to other banks." Mercurio sees a higher level of oil and gas loan-arranging activity for the bank this year versus last as a result of the recent wave of mergers among the major oils. Using the 80-20 rule, which assumes that the merged majors will prune their portfolio of assets by selling the least valuable 20%-those that no longer meet their return-on-investment hurdles-there should be more opportunities for efficient independents to make acquisitions, he says. "That, in turn, means more opportunities for us, in terms of M&A advisory, as well as arranging and providing financing for those acquisitions." Another reason loan volume should be up this year? "Given the oil and gas industry's history of returns versus other industries, and the fact that many investors may now see more downside than upside in commodity prices, the appetite of investors for holding E&P-related equities isn't all that strong right now, nor is the high-yield market for smaller operators," says Mercurio. "As such, pure bank lending becomes more of a viable financing alternative for producers." Adds Weiss, "We're aggressively pursuing our clients right now with substantial M&A ideas and the capital to fund them. What this tells you is that we're fundamentally very comfortable lending into the oil and gas industry." The bank is also comfortable with the near-term outlook for energy prices. Its integrated oils analyst, William L. Randol, recently raised his 2000 oil-price target to $24 from $21; meanwhile, its E&P analyst, Mark E. Fischer, has cut slightly his 2000 natural gas-price target to $2.30 from $2.40. Not surprisingly, the bank's recent lending transactions reflect its focus on the M&A arena. Last October, it sole-lead-arranged a new five-year, $750-million credit facility for Oklahoma City's Devon Energy Corp. That refinanced existing bank debt and helped Devon successfully complete its $2.6-billion merger with PennzEnergy Co. The facility also provided added liquidity for the larger, combined entity. Similarly, last November the bank sole-lead-arranged a $250-million, five-year revolver for Midcoast Energy Resources, a Houston midstream company. The credit allowed that $175-million market-cap company to complete the $195-million acquisition of Kansas Pipeline Co., with pipeline assets in the Midcontinent. "What this transaction demonstrates is that we're not afraid of helping small companies make large acquisitions relative to their size," says Mercurio. Also last fall, the bank represented Hollywood Marine, a private Houston service company engaged in barge transportation, on its sale to Kirby Corp.-a publicly traded Houston company also engaged in marine transportation. What makes the transaction interesting is that the bank, on one hand, advised Hollywood Marine on the divestiture, and on the other, sole-lead-arranged the $200-million, five-year revolving credit for Kirby that allowed that bank customer to acquire Hollywood Marine. Says Mercurio, "If we know assets are for sale, we'll bring M&A ideas to our clients-if we believe those assets are a good strategic fit for them. Should they feel the same way, we'll then advise them on-and offer to provide-the best financing structure to acquire those assets. This again fits with the idea of providing our customers one-stop-shopping." The fourth-biggest U.S. oil and gas lender last year, Bank One Corp. also has an appetite for serving a large menu of financial products-from senior and mezzanine debt to private placements to capital markets services. In 1999, the $260-billion-asset-sized bank agented nearly $9.3 billion of oil and gas credits. Separately, its commitments to the domestic energy sector out of its Houston, Dallas, Tulsa, Chicago and Canton, Ohio, offices totaled about $9 billion; its outstandings, about $4 billion. "Currently, we have some oil and gas loans on our books that are less than $10 million, all of which are important to us. However, our strategy is to provide much more than that," says Larry Helm, national head of Bank One's energy and utility group in Dallas. "We want to focus on those customers that are now $10- to $20 million in asset value, but that have the potential to grow to $100- to $500 million in asset size-the range where we think we can add a lot of value." The profile of such customers? "Operators with extremely knowledgeable and experienced management, as well as a critical mass of diversified properties not dependent on either oil or gas or one geographic region. Also, they should have some equity in their properties that allows for flexibility in structuring transactions, and a desire to grow through drilling, acquisitions or consolidation with other operators," says Helm. Fortunately, many of these customers are already in the bank's small-cap loan portfolio handled by Arthur R. (Buzz) Gralla, division manager of Bank One's national oil and gas producer finance group in Houston. "We bank private and public E&P companies with borrowing needs from $5 million all the way up to $100 million, and we do it through all industry cycles-not just when commodity prices are high like they are now," says Gralla. Case in point: Last May, Bank One committed to sole underwrite a $74-million, three-year credit facility that allowed First Permian LLC-a joint venture between Midland producers Parallel Petroleum Corp. and Baytech Inc.-to acquire Fina Oil & Gas Co.'s Permian Basin oil properties. "What made this transaction unusual is that we provided a significant amount of debt and agreed to hold the entire amount on our books-pending future syndication-at a time in the oil-price cycle when few banks were doing any financing, let alone structured deals," explains Gralla. In a similarly aggressive move, the bank began in January 1999-the winter of every oilman's discontent-to put in place for a private Midcontinent producer a trio of three-year revolvers totaling more than $30 million. This tiered financing allowed the operator to opportunistically acquire oil-prone properties from two major oil companies. "As a result of banking smaller-cap companies through the cycle, we not only solidified our own position in that end of the market, but also permitted a lot of operators to move up the growth curve toward that asset size at which we can begin providing them additional, larger financial services." One such bank customer that has reached that plateau is Dallas-based Comstock Resources Inc. "In April 1999, we led a $162.5-million revolving credit facility for the company, while concurrently assisting it with a $150-million high-yield debt offering," says Helm. "The transactions helped refinance its bank debt and lengthen the average maturity on its total debt. Also, the financings provided the company additional capital and liquidity for growth, either through drilling or further acquisitions." Does Helm see lending activity heating up this year? "I'm optimistic because higher commodity prices means more drilling and the need for more financing," he says. "However, I'm a little concerned that the recent dramatic increase in oil prices may affect M&A activity. When prices move up that high, that fast, it tends to pull a lot of potential buyers and sellers off the market, because they're too far apart with respect to their thinking on the valuation of properties. The cure for that is stable oil prices at more reasonable, historical levels." Houston-based James M. Kipp, managing director and head of energy investment banking for First Union Securities-a division of First Union Corp.-is also sanguine in his outlook for energy lending this year. But he's not relying solely on a highly active M&A practice to carry the day. "Energy is now being viewed by the market as a value sector rather than a growth sector," says Kipp. "As such, most institutions are directing their capital into telecom, high-tech and Internet issues, where they've achieved phenomenal rates of return during the past 12 to 18 months. So I don't see an overabundance of capital coming into the energy sector this year. In fact, there may be more energy transactions seeking capital markets access than there is capital to fund them. That's going to mean a large array of financing opportunities for us to provide not only senior debt, but also direct equity investments and private placements of debt and equity." Last year, Charlotte, North Carolina-based First Union Corp. agented $5.8 billion worth of oil and gas credits. Its individual commitments to the industry, meanwhile, totaled more than $2 billion; its outstandings, more than $1 billion. Says Kipp, "In the upstream, we bank companies with as little as $15 million in assets, as well as larger-cap names like Devon Energy Corp., Pioneer Natural Resources and Newfield Exploration Co. The consistent theme is that we're really supporting quality management teams-either as a provider of capital or as an arranger of capital." Proof: Last August, First Union provided Sapient Energy Co., a small, privately held Tulsa producer, with a $20-million, three-year credit facility to pursue acquisitions and existing exploitation opportunities in the Midcontinent. Subsequently in November, it provided a similar-sized senior debt facility for Classic Resources Inc., a private Dallas E&P company, to pursue the same strategy in East Texas. Next, acting as a capital intermediary, the bank last fall arranged the private placement of $22 million worth of equity for Houston-based Texoil Inc. The financing allowed the publicly traded Houston operator-in which First Union already had a direct equity stake-to pay down debt and aggressively pursue larger acquisition opportunities along the Texas and Louisiana Gulf Coast. Higher up the energy food chain, First Union last June replaced another financial institution as agent bank and book-runner on Plains Resources Inc.'s $225-million corporate revolver. Explains Kipp, "Plains gave us the mandate because we convinced them that we could do more than just provide senior debt-that we could provide one-stop-shopping, as far as sourcing capital." Indeed, on the heels of that mandate, First Union Securities comanaged a $75-million add-on to an existing Plains high-yield debt issue, which moved some of that operator's bank debt to a longer, seven-year maturity. In addition, last fall it comanaged a $50-million secondary issue of master limited partnership (MLP) units for the Plains All-American Pipeline LP. To boot, First Union Securities equity analyst Yves C. Siegel initiated research coverage on the MLP. Again in that arena, the bank last fall agented a $600-million credit facility for Kinder Morgan Energy Partners LP which allowed that MLP to continue its aggressive acquisition of pipeline systems. Earlier, in 1998, First Union Securities comanaged a $258-million secondary offering of Kinder Morgan partnership units. One more thing: the bank has had a direct equity stake in Kinder Morgan since that company's 1997 inception. Observes Kipp, "If we've grown in a credit relationship with an energy client, then bringing that company to the public markets to raise capital should be a testament to investors that we feel very comfortable with management." CIBC World Markets, which agented $2.8 billion worth of oil and gas loans last year, is no less committed to offering a broad band of financial products and services to North American energy companies across the entire capital-raising spectrum. "That can be as simple as arranging acquisition financing for a small, private producer to assisting Houston's Swift Energy Co. with multiple financings, including a $250-million credit facility, a $100-million convertible debt issue, a $125-million high-yield debt issue, and two common equity issues totaling $90 million," says Ron Ormand, managing director and head of U.S. oil and gas investment banking for CIBC World Markets in Houston. With offices throughout North America and worldwide, the $175-billion-asset-sized lender has commitments to the U.S. oil and gas industry of greater than $5 billion. "When the capital markets reacted negatively to the industry amid the downturn in commodity prices in early 1999, we were provided a great opportunity to creatively expand our lending business with operators with whom we knew we could grow," says Ian Schottlaender, managing director in CIBC's leveraged finance group in New York. Some of the new E&P clients the bank added last year include Fort Worth-based Encore Partners Inc. and Quicksilver Resources Inc., Denver's Key Production Co., Grapevine, Texas-based Prize Energy Corp. and Irving, Texas-based Magnum Hunter Resources Inc.'s subsidiary, Bluebird Energy Inc. How creative was the bank's help? In March 1999, Magnum Hunter wanted to take advantage of some asset divestiture opportunities in the low oil-price environment. "We arranged for Magnum's stand-alone subsidiary, Bluebird Energy, a $75-million revolving credit facility," says Schottlaender. "This allowed Bluebird to acquire attractive Texas and Gulf Coast oil and gas properties from Unocal Corp. and Vastar Resources Inc.-with the money borrowed nonrecourse to the parent." As the result of the commodity-price crunch of early 1999, Houston's KCS Energy Inc. recently found itself facing significant pressures from its banks and bondholders, and recognized the need to refinance its debt. Enter CIBC. "We've been mandated by KCS to agent and arrange $170 million of financing, the proceeds of which will allow the company to repay existing bank debt, repurchase a significant portion of its subordinated debt at a discount, and complete the restructuring of its balance sheet," says Schottlaender. "When this financing is completed, KCS will have gone from being a company with total debt of about $450 million in early 1999 to one with total debt of only $320 million-in a much stronger commodity-price environment." In what may be the best of all possible situations for a provider of financial services, CIBC last year found itself helping a pair of clients through two separate transactions that ultimately became intertwined. "In 1999, Pioneer Natural Resources in Irving, Texas, also recognized that it needed to reduce its bank debt as a component of its overall capital structure," says Ormand. "We helped determine that a restructured credit facility, in conjunction with asset sales, was appropriate." This triggered Pioneer's sale of certain Midcontinent and Gulf Coast assets. "On the heels of this, we were then asked by Prize Energy, which is majority owned by [Fort Worth-based] Natural Gas Partners, to co-agent a $250-million financing so that Prize could acquire, of all things, some of those very same Pioneer properties," he explains. Prize is headed by Lon Kile, a former Pioneer executive. Says Ormand, "Our lending and capital market assistance also extends to other energy sectors. Within the last year, we've agented credit facilities and led equity offerings for Midcoast Energy Resources and The Williams Cos. in the midstream, and have participated in credit facilities for Stolt Comex Seaway AS, the subsea systems provider." Wells Fargo & Co., which agented $972 million worth of oil and gas loans last year, doesn't currently have the ability to underwrite public equity and debt offerings, but like its money-center bank cousins, it wants to be a financial supermarket for the industry. "The best success story I can tell is one where we take an operator from an initial $1-million loan to a $100-million credit facility-and in the process introduce that client to acquisition opportunities, advisory services and investors that can help grow that company," says Tim Murray, senior vice president and managing director of Wells Fargo's energy group in Houston. Murray knows a lot about growth. During the past five years, his bank has doubled in size twice-initially through its acquisition of First Interstate Bank in 1996, then through its merger with Norwest Bank in 1998. Last year, the bank sourced 25 new oil and gas borrowing relationships, adding about $560 million in commitments. Today, the $203-billion-asset-sized lender has about $3.1 billion in commitments to the industry, with outstandings of $1.9 billion. The ideal credit candidate to which Murray alluded? One of them is Breitburn Energy Corp., a private Los Angles-based operator. "In March 1997, we underwrote a $32-million credit facility that allowed current management to buy out their limited partners in an entity focused on Los Angeles Basin oil reserves, and still have capital for drilling," he says. The following year, the bank, acting as financial intermediary, introduced Breitburn's management to EnCap Investments LC, which took a $30-million stake in the operator in the form of convertible preferred and common stock. The equity infusion allowed Breitburn to accelerate production-enhancement projects in the L.A. Basin, and gave it the liquidity to acquire additional properties in the region. "Just recently, we've increased the company's borrowing facility to $150 million to facilitate further acquisitions, and have brought a few more banks into the credit syndicate," says Murray. "Eventually, we hope Breitburn-which we've helped grow since our initial management-buyout financing-will achieve the size to go public." When conventional bank financing isn't available for growth, Wells Fargo Energy Capital Services is. In April 1997, this bank subsidiary, which specializes in nonrecourse, project financings, provided Daimon Partners-a partnership of two private Austin, Texas, operators-$2.5 million in development financing to drill up reserves in the Southwest Speaks Field in Lavaca County, Texas. At the beginning, Daimon's net gas reserves position was 4- to 5 billion cubic feet," says Murray. But since then, the bank subsidiary has upped its backing to $19 million, which has supported the drilling of 15 more wells. Now Daimon's net reserves are 28 Bcf, with daily gas production of 65 million cubic feet. For more financially strapped operators looking to get back off the mat, there's another arm of Wells Fargo, Foothill Capital, that might provide backing. It's an asset-based lender-meaning that it focuses entirely on the collateral it's lending against. Within the past six months, Foothill Capital has provided credits totaling more than $60 million to three distressed E&P companies based in Houston, Dallas and Tulsa. Wells Fargo also makes direct equity investments in oil and gas. In 1998, the bank invested $10 million of equity in a $100-million fund run by Houston's Enervest Management Co. LC. The fund was set up to acquire producing properties throughout the U.S. Separate from this equity stake, Wells Fargo is also a $25-million participant in a $100-million credit facility that's available to this leveraged-acquisition fund. "There are fewer banks coming to the energy lending table today than there were in 1997. And that's good news for us," concludes Murray. "It means more opportunities to back, early on, those smaller Patch players that will eventually need more financing services from us when they're larger-cap names." That's also good news for would-be borrowers shopping for credit, and other financing and advisory needs, in today's new capital malls. That's assuming, of course, they're good comparison shoppers.