The loss of mezzanine financing by Enron, Aquila, Shell and Mirant is tremendous by remaining financiers' counts. "We believe about $2 billion of previously available capital for oil and gas has vanished," Chip Webster, executive vice president and managing director of Duke Capital Partners said at the annual John S. Herold Inc. energy conference recently. Tim Murray, executive vice president and energy group manager at Wells Fargo Bank, said the number of oil and gas mezzanine lenders has dropped from nearly 13 in the mid-1990s to about four today. Marty Phillips, a managing director and principal of EnCap Investments LLC, estimates $500- to $600 million has left the market annually. The three financiers joined others in putting the mezzanine lending picture in perspective. Mezzanine lending's decline has been significantly offset by the private equity market's growth, some said, and others suggested that former mezzanine finance principals are preparing to return to the business. "It's pretty shocking when you think of what happened to some companies that were involved in mezzanine lending," said Natural Gas Partners LP managing partner Kenneth A. Hersh. "They had several things in common. They all had good people and good backing from companies with strong (or, in Enron's case, apparently strong) financial structures. But they had no business being in mezzanine lending, which is intense and highly focused. We all would like to look at Aquila, Enron and Mirant and blame merchant energy blowups for what happened to their mezzanine lending divisions. But there were others who suffered from poor executions and weak business plans that collapsed too." He contended that such mezzanine lenders suffered from two basic problems. First, their parent companies became intoxicated with robust energy lending markets. "They got drunk on cheap capital that was funneled their way. When the markets open up, the velocity of capital is extremely fast. Markets got overloaded, returns came down and dead bodies were left in the wake. It's recent enough that we all can remember the euphoria and the feeling that it could only go one way-up," Hersh indicated. Second, financing divisions focused on their parent companies' cost of capital and tried to meet lending quotas. "Many companies became victims of competition and their own success," said Hersh. "The discipline has to come from capital providers themselves." He suggested that producers remember that capital availability actually hasn't changed materially in 10 years. "The one thing that's gone is the funny money. As an industry, we need to stop whining, stick to the knitting and not chase fads" First Reserve Corp. vice president Hardy Murchison added, "E&P capital always has been cyclical. Profitability generally is counter-cyclical, with the worst deals done when commodity prices peak. The mezzanine capital loss is relatively small, offset by increases in public equity. The merchant sector's departure has reduced available capital, but deals still are being done." Riverstone Holdings LLC principal John Lancaster conceded that mezzanine lending is a significant slice of the overall oil and gas finance pie. "But the relatively small lack of capital availability is not a significant variable compared with purchase price, asset performance optimization, commodity prices and equity values. Not only are there more declarations among general funds that they'll make more money available for energy, but others plan to do so quietly. Like everyone else, they favor proven managements with aligned interests, geographic focus and expertise, and value driven by proved, developed and producing (PDP) reserves, with a clear strategy for PUD [proven undeveloped] and probable reserves." Webster expects that there always will be a market for mezzanine capital because while it is more expensive than publicly issued debt, it is easier to obtain and less expensive than equity. Murray expects principals from Aquila, Mirant and Shell Capital will come back into the business, while J.M. Huber Corp. is expected to open a mezzanine finance division early in 2003. Phillips said, "The mezzanine market is very shallow and thin. There were only a few deals that provided good returns and competition was tough. It's hard to make aggressive debt work." Private equity has been oil and gas lending's bright spot, with approximately $5 billion raised during the last 18 months, he added. "It is a great time to secure private equity capital, with adequate availability and limited competition for dollars."