The oil patch was abuzz with new E&P activity in 2005, which forced many capital providers to keep in step. High commodity prices and growing oil and gas demand attracted new funds to the energy market, kept the M&A game going and convinced investors that energy is still one of the hottest markets to be in. In turn, upstream capital providers became more flexible in their deal terms, creative at finding lending niches and determined to keep loan volumes high. Early in 2005, most capital providers realized the bulk of U.S. producers were flush with cash. The E&P scramble was not for funding, but for prospects, so lenders found they had to work hard to make their services more attractive to borrowers. "There was plenty of capital to go around," says Mickey Coats, senior vice president of Tulsa-based bank BOK Financial Corp. "I think the competition for senior-debt financing was as fierce as I have ever seen it in 2005. Banks were so hungry for loan volume that the competition drove rates down and covenants were loosened. It was certainly a borrowers' market." Tim Murray, Houston-based managing director of financier Guggenheim Partners, says, "Commercial banks are again at the aggressive end of their lending spectrum. Mezzanine firms have retooled and are funding start-ups in competition with the private-equity firms, and E&P firms are again in favor with the public markets." Murray adds that while capital availability has always been cyclical in the E&P sector, what has changed in the last 10 years is the ability to insure against price volatility via hedging. "Prior to the prevalence of hedging, lenders suffered large losses through the commodity cycles. The boom-bust cycles and resulting loan losses discouraged new capital-provider entrants and moderated the aggressiveness of existing lenders." In addition to capital availability, Murray also gives credit to technology, opportunity and people for the streak of successful E&P start-ups last year. He says reservoir engineering and seismic-interpretation software leveled the playing field for start-ups while drilling and stimulation technology gave these companies a significant entry point and room to grow. Acquisition and development opportunities were plentiful as the majors and large independents kept shifting their focus internationally and in the deepwater Gulf of Mexico, he adds. And, divestitures of legacy properties by the major oils also spawned a number of successful start-ups. "Start-ups require entrepreneurs with industry expertise willing to take risks. The industry consolidation in 2005 and prior years provided a steady supply of experienced management teams. The availability of capital emboldened these teams to take risks." Cameron O. Smith, a principal with capital-intermediary and-provider Cosco Capital Management LLC, says investors and experienced managers are showing real discipline. "I don't see the types of foolhardy capital destruction we saw in the early 1980s. That's good for all of us." In 2005, investors were interested in both drilling stories and acquisition strategies, which further heightened competition among lenders. Coats adds that projects that attracted a good deal of capital included companies with mature management and property sets that had upside, or proved undeveloped and proved developed nonproducing assets. Looking ahead, Glynn Roberts, president of Houston-based producer Northstar Interests Inc., expects competition between capital providers, including competition between lending niches, to grow. "I believe this bodes well for E&P companies that need capital. The industry is attracting capital in large doses and the capital needs a home. Eventually, the abundance of capital will cause some providers to do deals where they are not adequately compensated for their risk." Smith adds, "Heightened activity means more competition for capital, goods and services, most particularly including personnel. The very fortunate coincidence is that this time around, the upswing comes as there has never been a better developed capital structure, more mature operators/managers, better/more efficient technologies, and a greater amount of landscape that is commercially attractive." Murray says, "Without a significant commodity-price correction to expose the riskier players, increased competition may be a fact of life in the capital markets for an extended period of time. Obviously, this competition amongst capital providers is a bullish development for upstream firms requiring flexible and inexpensive capital to pursue their strategies." The projects many capital providers expect to draw hefty backing in 2006 include unconventional reservoirs, whether they are coal and shales, or bitumen and stranded gas. Smith says, "The point is that experience, coupled with new technology and capital, points the way to new resources under all changing circumstances. The question is, simply, who is prepared to stake his claim first." In 2006, Smith expects financing terms to be drawn out longer, whether by access to the public market, or providing flexibility to stay investing for greater than 10 years. Murray says, "As in all of the previous cycles, competition will stretch the market until a number of deals fail and rational activity will return."