The recession may be officially dead and many banks' balance sheets seem solvent, but a stingy borrowing climate persists after the 2007-2009 meltdown. The notion of tightwad financiers is less the oxymoron that it once was, pre-2007, and beefed up due diligence is in vogue.
So runs a common thread among attendees and speakers at this week's Oil Council's Americas Assembly in New York.
The "friction points" between bankers and borrower wannabes, as one banker wryly puts it, are many compared to days when cheap money flowed. New Basel III international banking standards will putatively call for banks to hold greater amounts of capital.
"There's a race for conservatism," Andrew Moorfield, managing director and head of oil and gas at Lloyds Banking Group, told attendees, between which banks will hold the greatest amount of capital.
Some banking clients will experience sticker shock. Many "average" upstream lending deals are likely 200-300 basis points more costly, post-Macondo, Moorfield said. "Overall rates have increased," he said. "That takes time for clients to digest."
And brace yourself for intrusive reviews. "We are extraordinarily intrusive about capex," Moorfield said, adding how in one case, a borrower's "capex" plan included a jet. "Those days have certainly ended," he said.
Also gone is 100% predevelopment financing when a decent-enough CFO and a crack operational team with the vision thing nailed down could bag a financial lifeline without breaking a sweat. "No sensible bank" today is doing predevelopment financing, Moorfield later said on the sidelines of the council's conference. Financing a single asset field is another no-no. Today, "you need a good portfolio," he said. Lloyds, which has an office in Houston, has a team of nine petroleum engineers that pore over maps and seismic data of prospective borrowers.
Others say they are stressing the "diligence" part of due diligence. "The problems with business is ... people don't do their due diligence," the at-times acerbic Ziad Abdelnour, president and CEO of Blackhawk Partners, told attendees. "If Goldman Sachs was so smart," then billionaire investor Warren Buffett would not have needed to bail them out, he said. Blackhawk Partners is a family office firm representing 23 families, with $4.2 billion in investments, he said.
"Your due diligence has to be extremely diligent," he said, adding that his staff includes "four ex-intelligence guys" who comb the professional and personal backgrounds of target investments' management teams.
Moorfield's Lloyds is "agnostic" to whether the borrower is a private equity firm wanting to bag a company or seasoned entrepreneurs, he said. The bank was a financial backer of UK's Dana Petroleum founder Thomas Cross. As Cross "will go off into the sunset...we'll likely bank him" should he establish a new venture.
(Cross founded Dana in 1994. South Korea's state-run KNOC now controls more than 90% of the shares of the UK's Dana Petroleum and October 13 said it would exercise its right to launch a compulsory takeover of the remaining shares in the latest development of a months-long hostile takeover.)
Deals, of course, are getting done. There's "a lot" of activity in West Africa and industry is seeing field possibilities in Greenland, Moorfield said. "We just sent out a term sheet today" ahead of a finance deal, he said, without providing details.
But amid a tougher scenario, more asset-based transactions are likely, said Bobby Tudor of Tudor, Pickering, Holt & Co, so small E&Ps "can effectively live to fight another day." For now, scrappy survivors include Pennsylvania-based independent Rex Energy, which this year scored a joint venture development agreement to produce natural gas in the Marcellus Shale with Japanese investment firm Sumitomo Corporation; and Carrizo Oil & Gas, which said in August that it would sell a 60% stake in essentially all of its Marcellus Shale acreage in Pennsylvania for $392 million to India's Reliance Energy, he said.
"The question is when does the buyer list run out?" Tudor said. "There's not a bottomless list. At some point the music stops."