A frustrated and candid energy lender said at the annual NAPE in Houston recently that the competition to place loans with cash-rich producers today isn't the only challenge in the commercial-debt space. Pressure is coming from another side: asset owners can sell their properties today for significantly more than they can be banked. For example, the banker said, he could only lend $20 million on one Texas property package when evaluating only its proved, developed producing reserves and assigning the bank's forecast for commodity prices. Meanwhile, the assets' owner ended up selling the package for more than $200 million. The buyer, a publicly held E&P company, is assigning value to potential reserves and using a higher commodity-price forecast. Though banking institutions were quite outnumbered by E&P companies at NAPE, there's plenty of capital to go around, and competition among financiers is increasing. "There's lots of competition going on in the capital markets," said Warren Shimmerlik, a principal at Cosco Capital Management. "It's not a good sign that cash isn't king anymore, but it's still a good environment for everyone." Tim Murray, executive vice president and energy group manager with Wells Fargo Bank, said, "You also have a lot of old experience moving around to different places within the business." He added that while the capital-markets environment is certainly changing, it's "not uncomfortable-yet." Frank Weisser, co-founder of advisory firm Weisser, Johnson & Co., agreed. "There's a lot more money but fewer people that need it, thanks to the higher commodity prices. And the people who have money to place are being very selective with the capital they have. So in the end you have more money than good projects." Murray said, "The pricing environment has degraded considerably." Both Murray and Weisser named hedge funds as an example of a unique financial structure that has become more interested in the energy business and one that's changed the way capital markets work. Despite the slight shift in dynamics, Murray said everyone can still get a little piece of the pie. Some expect current trends are destined to shift; others disagree. "It will be interesting to see what happens with drops in pricing and more aggressive capital strategies," Murray said. "Current pricing is going to make the cost of capital pretty cheap and you'll see structures really being stretched." -Bertie Taylor
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