Independents throughout the U.S. are rediscovering in the credit markets the truth of an old adage: as one door closes, another opens. At first glance, the news may look a bit negative: with all the recent money-center bank megamergers, only half the number of energy lenders exists today as were in the market five years ago. What's more, the remaining giants of credit-burned by Enron-like exposures-have become cautious, lowering the percentage of an energy loan they will hold. And yes, they've also elected to go up-market to pursue lucrative, fee-based investment-banking transactions among larger oil and gas company clients. Small and midsize independents, however, need not fear being wallflowers, for they are getting increased attention from regional banks. The reason? Repositioning in the lending landscape has opened doors of opportunity for smaller, regional lenders in the oil patch, and a few newcomers-and they're seizing the day. Notably, with the pull-back in hold positions by the larger banks, regional lenders are beginning to participate more in syndicated energy credits. That's all to the benefit of borrowers, as is the notion that regional banks may be more attentive to them. One Denver lender sums it up this way: "Oil and gas borrowers like a local presence and local decision-making, especially smaller producers. They also like the concept of community banking, where a lender is willing to come up with innovative ways to make a credit relationship work. The bigger banks tend to put a fence or box around lending parameters." On-scene, personal lending presence-not remote management of credits-and the chance to participate more in syndicated loans may be two of the key reasons why so many regional banks are beginning to see a surge in energy-lending activity. Fortunately for oil-patch borrowers, they're willing to be innovative, make loans as small as $2 million and, in some cases, take higher hold positions in a credit than some of the larger banks. But like their large-bank brethren, regional banks chase the same ideal: a borrower whose seasoned management team has already demonstrated the ability to create value, growth and returns. Compass Bank "With fewer banks around today and the larger, money-center lenders lowering their loan hold limits, we've been invited into more syndicated credits for oil and gas producers. That, in turn, has allowed us to sell more of our other, fee-related banking services to those borrowers," says Murray Brasseux, executive vice president and head of the energy banking group for Compass Bank in Houston. Indeed, Compass Bank, with assets of $23.5 billion, added 18 new oil and gas credit relationships last year totaling about $160 million. Overall, the bank currently has energy loan commitments of about $330 million and outstandings of around $260 million. Some of the bank's significant new relationships include Magnum Hunter Resources, Comstock Resources, Encore Acquisition Co., The Houston Exploration Co., Chesapeake Energy, Howell Petroleum and Ultra Petroleum. The lender's participation in these syndicated credits-typically two- to-four-year revolvers-is at the $10- to $20-millon level, with pricing ranging from 125 to 250 basis points above the London Interbank Offering Rate (Libor). "In most cases, we've expanded those relationships significantly beyond the point of the loan," says Brasseux. This includes offering clients risk-management services, Internet-based treasury management services, private client services for executive management, or asset-management services wherein the bank makes secure, short-term investments for clients at the highest possible rates of return. Through its wholly owned, Houston-based subsidiary, Albrecht & Associates Inc., Compass also provides fee-based asset divestiture services, selling oil and gas properties for loan customers or other parties. During the past several years, the bank subsidiary has handled more than $2.5 billion worth of asset sales. While Compass is benefiting from a stepped-up level of syndication participations involving credits for publicly traded producers, it's also aggressively targeting smaller, privately held oil and gas operators-those with borrowing needs as low as $2 million. "Within the past six months, we completed a $7-million, two-year term loan, priced 200 basis points above Libor, for a private Gulf Coast producer looking to make an acquisition," says Dorothy Marchand, senior vice president and manager of energy lending. "What made the transaction unique is that the loan was subordinated to another lender; however, we were able to structure the facility so that it had credit enhancement, such that we could look for loan support beyond the producer's oil and gas assets-to external commitments to the operator." What also made the transaction unique was that the bank had only nine days to complete the acquisition financing. How did it manage to move so fast? Says Marchand, "No sleep." In making such reserve-based oil and gas loans, which are scrutinized by three staff petroleum engineers-each with more than 15 years of experience-the bank looks primarily at proved developed producing reserves. "However, we will let up to 20% of the present value of the properties we use in the borrowing-base computation consist of nonproducing properties," says Brasseux. Guaranty Bank One of the newer energy lenders in the oil patch, Houston-based Guaranty Bank made its first oil and gas loan in May 2001. Since then it has closed more than 15 such transactions, strictly for small-cap independents-two-thirds of them privately held-whose borrowing needs fall within the $5- to $50-million range. "During the past 18 months, many money-center banks have up-tiered their energy client focus, neglecting the small-cap independent," says Arthur R. (Buzz) Gralla Jr., senior vice president and director of all U.S. oil and gas banking for Guaranty Bank. "In addition, many larger banks today are retaining significantly smaller portions of syndicated energy loans. Years ago, they would have retained $40- to $50 million of a credit; now they're probably holding only $25- to $30 million on their books. This, too, has spelled opportunity for banks like us. We'll typically take a $40- to $50-million exposure in an energy credit before bringing in other banks" Also, since megamergers swept the banking industry, with the attendant focus on expense control, downsizing of energy-lending staffs, including engineers, has followed. "This again has spelled opportunity for us because the smaller end of the energy market requires a lot more attention. At Guaranty, we have a staff of five energy bankers, two petroleum engineers and an engineering technician." With assets of $15 billion, the bank currently has oil and gas loan commitments exceeding $400 million and outstandings of about $300 million. Although its focus is the smaller-cap producer, the bank is also capable of leading a $200-million syndicated credit. "We're a very traditional bank, focused primarily on the lending product," says Gralla. "The bulk of our oil and gas customers tend to be producers with seasoned managements that have been through the downturns, and are both financially and technically disciplined." In its reserve-based lending, Guaranty looks mainly to proved developed producing properties for collateral. However, it will allow up to 25% of an onshore operator's borrowing base to be comprised of various forms of nonproducing reserves; in the case of an offshore operator, up to 35% of the total borrowing base can be nonproducing reserves. This past March, Enid, Oklahoma-based Continental Resources-which has publicly traded bonds-selected the bank to co-lead a $140-million, three-year revolver, priced 200 basis points above Libor. The credit facility allowed the operator to expand a major waterflood program in North Dakota and South Dakota. Earlier, in November 2001, Guaranty led a $125-million syndicated credit facility-retaining $45 million on its own books-for a private Midland producer. The three-year revolver allowed the operator to step up development drilling in the Permian Basin. "During the summer of 2001, this operator realized that its former bank was up-tiering, and that it needed a new bank," notes Gralla. "About that time, the company read the August 2001 Oil and Gas Investor cover story on the changes going on in Houston oil and gas banking-which mentioned us-and gave us a call." At the smaller end of the lending scale, the bank in June 2001 completed for Contango Oil & Gas, a publicly traded Houston independent, a $10-million, three-year reducing revolver, priced 200 basis points above Libor. Since then, Guaranty has more than doubled that facility to $24 million. "Contango has been very successful in growing its South Texas gas production through a combination of exploration, development drilling and acquisitions-and has needed capital along the way to take those steps," says Gralla. "This is a good example of how rapidly a lending relationship can grow." Bank of Oklahoma-Denver In recent years, Tulsa-based BOK Financial Corp., the holding company for the Bank of Oklahoma NA, has expanded into the Lone Star state under the Bank of Texas name and into New Mexico under the Bank of Albuquerque banner. This past January, that banking footprint enlarged when its Bank of Oklahoma arm opened a Denver office to focus on small-cap producers with borrowing needs of $20 million or less. "Energy lending in Denver is a toehold-an immediate natural fit for the bank-into the region," says Tom Foncannon, senior vice president in charge of the new Denver office. "It's a growing gas production area, and we're bullish on gas, long-term. Down the road, however, the bank plans to expand its presence in the market, either by buying another bank or by moving into the commercial and industrial lending areas." With $11 billion in assets, the overall banking institution-through its offices in Tulsa, Oklahoma City, Dallas, Houston and now Denver-has energy commitments approaching $1.7 billion and outstanding energy loans of nearly $1 billion. "Oil and gas borrowers like a local presence and local decision-making, especially the smaller producers," says Foncannon. "They also like the concept of community banking, where a lender is willing to come up with innovative ways to make a credit relationship work. "Too often, in the case of larger, merged institutions, the management of credits has become increasingly remote, and lending more wholesale in nature. The bigger banks tend to put a fence or box around lending parameters, and if a client doesn't fit within that box, they're not terribly interested in being innovative. In our view, a 'one-size-fits-all' lending approach doesn't work that well." What the bank's Denver energy-lending office is counting on to draw local oil and gas business is the depth of its staff. Foncannon, former head of western U.S. energy lending for Wells Fargo & Co. in Denver, is joined by Mike Logan, also recently of Wells Fargo, and Allen Rheem, former head of energy lending for the Bank of Cherry Creek in Denver. Each has nearly 30 years of banking experience, mostly in the energy sector, and a wealth of energy contacts in the Mile High City. Since its January opening, the bank's Denver office has either closed, or is about to close, on 15 oil and gas credits-11 for private producers-totaling $100 million. Among its more innovative credits, the lender this past June completed a one-year, $10-million revolver for a private Denver operator. "This company had difficulty qualifying for a loan, based on just its oil and gas assets," explains Foncannon. "So we looked at its total financial picture-marketable securities, real estate and its undeveloped acreage position-and were able to put together the credit that way." A month later, the bank completed a $6-million, one-year bridge loan that allowed another Denver producer to purchase a package of oil and gas properties for ultimate resale. Says Foncannon, "Other banks weren't interested in this concept because they didn't believe it would lead to a long-term relationship. We feel that it will. Why? The operator, which has a seasoned management team, plans to do this again." Among Denver's publicly traded oil and gas companies, the bank has $5- to $15-million participation in syndicated credit facilities for TransMontaigne, Key Production Co.-now known as Cimarex Energy-MarkWest Energy Partners and Tom Brown Inc. The loan pricing on these credits, and on those for the private producers, ranges from 150 to 300 basis points above Libor.