While other Wall Street market-makers this year were largely focused on capital-markets transactions for E&P companies, Goldman Sachs was primarily busy with deal flow for energy-convergence/power-merchant companies. "The markets in 2003 were incredibly receptive to high-yield or convert transactions for merchant-energy issuers such as Dynegy, Reliant Energy, Calpine and The Williams Cos.," says Chansoo Joung, Goldman Sachs managing director and head of the energy and power group in New York. Case in point: this August, the firm led a two-tranche, $750-million high-yield offering for CCFC, which financed a group of merchant power plants for that California-based Calpine subsidiary. "The deal was unique in that the subsidiary probably wasn't capable of being financed in the conventional sense because of its risk exposure to both power prices and natural gas prices," explains Joung. However, Goldman Sachs' commodities-trading group, J. Aron, was able to put in place a hedge that locked in a certain spread between gas prices and power prices and hence, guaranteed a level of cash flow sufficient to service the high-yield debt. "What's more, the deals were done at Libor plus 600 [basis points] and Libor plus 850 for six- and eight-year maturities, respectively-remarkable for an entity that was not able to be financed otherwise," says Joung. "Going into 2004, the energy-convergence/power-merchant sector will continue to need access to the capital markets." Earlier this year, the Wall Street firm led an aggregate $3.3-billion high-yield and bank second-lien financing for Calpine while completing a better than $1.2-billion high-yield and bank funding for refiner Tesoro Petroleum. Other large deals-this time in the oilfield-service sector-included a $1-billion convert and a $1.05-billion senior-notes offering, both for Halliburton, and a $1.3-billion convert for Schlumberger. Why the firm's lack of emphasis on upstream deals? "With record levels of earnings and cash flow resulting from high commodity prices, producers didn't need external financing," the banker says. But that's only part of the story. The fact is, operators also didn't have many sizeable reinvestment options in North America. "This lack of sizeable prospect opportunities has resulted in higher finding and development costs, less production and ultimately, higher oil and gas prices," he contends. Today, the alternative growth avenues for U.S. producers include tapping unconventional resources such as coalbed methane, tight-sands gas, deep drilling in the shallow part of the Gulf of Mexico or international. "The good news is that the major oils are increasingly focusing on places like Russia and the Middle East, away from such traditional producing areas as Norway, the U.K. and Indonesia," says Joung. "Over time, that's going to create more opportunities for independents looking to rotate out of their core domestic business into less mature provinces." He cites Apache Corp.'s acquisition this year of the North Sea assets of BP as that major steered its attention to a 50/50 joint venture in Russia with TNK. Goldman Sachs represented TNK in that pairing, for which BP paid some $6 billion in cash, stock and property. Concurring with his other colleagues on The Street, the banker notes that 2002 and 2003 were relatively quiet years for energy-related M&A deals-partly because of so much industry consolidation in 2000 and 2001 and partly because of the Sarbanes-Oxley Bill and concerns by directors over corporate-governance issues. "In 2004, however, we should begin to see a slow recovery in the M&A market," says Joung. "But this time, it will likely involve independents buying other independents. The majors are more or less done with their asset-divestiture programs." Whether public equity issuance picks up is another matter. So much depends upon commodity prices. "In the environment we expect-continued strong oil and gas prices-I don't think we'll see a lot of that type financing." If there's any uptick in energy-related deal flow in the capital markets, it would be on the debt side-whether that's bank debt, high-yield or investment-grade, he asserts.