Nick Swyka is one of the old timers in the Houston energy dealmaking business. Vice chairman of Simmons & Co. International, which advises mostly oil services companies on transactions, the Delaware native has been doing deals in Houston since the late '70s; indeed, he can remember being on vacation in rural Utah and having to stop by a roadside telephone booth and have a midday discussion on deal points that lasted more than two hours in temperatures well north of 90 degrees. "The early lack of cellphones was both a curse and blessing," he says.
Since then, Houston dealmaking has changed. Technology has altered the way all bankers do their jobs, making communication easier and allowing deals to happen more quickly, from what would previously take a year's time to a month or two.
But because of a scarcity of energy around the world, the rise in oil and gas prices, and technological advances that allow for easier exploitation of natural gas and now oil from shale, Houston, which has long claimed to be the energy center of the world, has become the center of energy dealmaking in the U.S. Over the past several years, investment banks, law firms and private equity firms have arrived in droves to join the community and gain face time -- and business -- that e-mail and a few days a week in town can't quite capture. Observers say it's not unlike dealmakers' migration to Silicon Valley in the early '80s.
"The difference in Houston is there's a huge concentration in one industry that doesn't exist anywhere in the world, and over the past decade, the bulk of the energy bankers on the Street have moved from New York to Houston," says Osmar Abib, who was recently named global head of oil and gas investment banking for Credit Suisse Group in Houston, where he's been based for 16 years. "So even if you're in Houston several days a week, you don't interact with these people all the time, who you might see at a ball game, in church, at dinner or where your kids go to school. That doesn't lead you to get the mandate, but it helps you build a stronger relationship when you become part of the community. It's all about personal contact."
Greg Pipkin, a 22-year veteran Houston energy banker who brought most of Lehman Brothers Holdings Inc.'s energy team over to Barclays Capital after Lehman imploded in 2008, agrees: "If you want a successful energy practice, you have to have a significant position in the Houston market."
It's happening in private equity, too. Kohlberg Kravis Roberts & Co. LP opened an office in Houston in 2009, hiring 28-year McKinsey & Co. veteran John Bookout to oversee its oil and gas investments, which have so far included East Resources Inc., Hilcorp Energy Co., KKR Natural Resources (which bought properties in North Texas' Barnett Shale from ConocoPhillips Co. in January for an undisclosed sum) and a natural gas processing and transportation venture with El Paso Corp. Blackstone Group LP hasn't opened an office in Houston yet, but according to one banker, "If they're serious about oil and gas, they need to get on the ground here."
Other buyout firms are expanding. Dallas-based Natural Gas Partners recently moved one of its principals, Tomas Ackerman, to the Houston office and brought John Homier over from its business development group, NGP Capital Resources Co., as a venture partner. New ones are forming, too, including White Deer Energy, which is run by Thomas Edelman, a veteran of Snyder Oil Corp., Range Resources Corp. and Patina Oil & Gas Corp. White Deer raised $821 million last year, and it has so far invested $60 million to turn around embezzlement-troubled onshore oil and gas company PostRock Energy Corp.
The migration to Houston is happening with law firms as well. New York firm Latham & Watkins LLP opened an office in January of last year, hiring away partners from the Houston offices of Baker Botts LLP, Vinson & Elkins LLP and Akin Gump Strauss Hauer & Feld LLP (including energy dealmaking powerhouse Michael Dillard). It's expanded since to 36 people and is now building out a new office in downtown Houston to house what could accommodate 100. Cadwalader, Wickersham & Taft LLP also opened an office in January, hiring Robert Stephens away from McDermott Will & Emery LLP to lead the office.
"There have been other folks in this market before, and they would take one of two tacks: have a mail drop and do some energy deals and overflow work for other offices; or focus on project finance, litigation and middle market. We did it differently, bringing in a group that could do high-end capital market, M&A and private equity, and the market has understood that," Dillard says in explaining the firm's success in capturing local deal work, including seven of the past nine initial public offerings of master limited partnerships.
Simpson Thacher & Bartlett LLP will follow suit this summer and has hired former Vinson & Elkins partner Robert Rabalais to lead the office. "We've been considering it for quite a while, and once we got through the financial crisis, we actually saw greater opportunities with our existing clients," says David Lieberman, head of the firm's energy and infrastructure practice, noting such clients as J.P. Morgan Chase & Co., First Reserve Corp., KKR and Blackstone.
Paul, Hastings, Janofsky & Walker LLP, Kirkland & Ellis LLP and even Linklaters LLP of the U.K. are said to be looking to do the same. Reed Smith LLP was also eyeing the market last year when it entered into what became fruitless merger talks with Dallas-based Thompson & Knight LLP, which has a busy practice in Houston. Dewey & LeBoeuf LLP has had a Houston presence since predecessor firm LeBoeuf opened an office in 1998.
With the new entrants, homegrown legal shops are feeling the heat. "[The outside firms] see energy as a great area to be in, and it's become a very competitive environment, which means we have to continue to ramp up our game," says longtime V&E partner Mark Kelly, noting that the firm has still been able to snare the legal work for 80% to 90% of the shale deals that have been announced so far.
Houston has never been provincial or insular, always welcoming outsiders to start and grow companies and do deals, much like the Lyle Lovett song, "That's Right (You're Not From Texas)," which goes on to say, "But Texas wants you anyway." It started with the Allen brothers, who established Houston on a swamp in the 1830s and sold lots, pitching its "healthy sea breeze and spring water." Its roots as a make-something-from-nothing place have given it an entrepreneurial bent that has made it home to several colorful wheeler-dealers over the years.
They started with John Henry Kirby, an East Texas farm-boy-turned-country-lawyer who, after defending a group of eastern lumber companies in a lawsuit in the late 1880s, put some Boston and New York investors together and spent the next 20 years buying East Texas timberland and the oil rights under it, then merged it all into Kirby Lumber Co. and Houston Oil Co. Texas Monthly called it the most spectacular Texas deal of the 20th century. (Kirby went bankrupt during the Depression, and Houston Oil eventually ended up as part of Atlantic Refining Co., or Arco, which was later purchased by BP plc.)
Next came Hugh Roy Cullen, who diversified from cotton and real estate to energy, discovering his first oilfield in the early 1920s. He subsequently bought up properties that others believed were exhausted and applied new techniques to enable deeper drilling, becoming known as "the King of the Wildcatters." He later sold his properties to Humble Oil Co. (now part of Exxon Mobil Corp.), then did it all over again with Quintana Petroleum, which as Quintana Capital Group LP is now primarily a private equity firm with interests in several oil and gas and coal companies (and is run by Cullen's grandson Corbin "Corby" Robertson Jr., who's also CEO of coal company Natural Resource Partners LP).
And who could forget Hugh Liedtke, the portly, Wall Street-savvy former partner of George H.W. Bush who built Pennzoil into one of the largest independent oil and gas companies in Texas through a series of mergers and one of the first hostile takeovers -- the 1968 purchase of United Gas Pipeline Co., which was 5 times Pennzoil's size ("It was like a minnow swallowing a whale," went the refrain at the time).
Liedtke may have lost his handshake deal to acquire Getty Oil to a $10.2 billion counteroffer from Texaco. But he had the last laugh when his company, represented by Houston litigator Joe Jamail, won a $10.5 billion verdict from Texaco in 1985, which was whittled down to $3 billion but still pushed Texaco into bankruptcy in 1987. (Texaco was bought by Chevron Corp. in 2001 and Pennzoil by Royal Dutch Shell plc in 2002.)
There are few characters of that magnitude left in Houston's energy dealmaking business, which is run mainly by well-educated, experienced operators such as Jim Hackett of Anadarko Petroleum Corp., Steven Farris of Apache Corp. and Jim Mulva of ConocoPhillips. One exception: the 92-year-old George P. Mitchell, the son of Greek immigrants who was first to go after shale gas in North Texas with horizontal drilling. Despite selling his namesake company 10 years ago to Devon Energy Corp. for $3.5 billion, he is still at it, investing in Houston-based Alta Resources LLC, which recently inked a $1 billion commitment with Blackstone so it can buy up unconventional oil and natural gas assets in North America. (Blackstone has also invested in GeoSouthern Energy Corp.)
Houston dealmakers have seen a lot of booms and busts over the years, from the mid-'80s, when lower consumption and higher OPEC production led oil to sink to under $10 a barrel, to the financial crisis of 2008, when oil went from $140 to $30 per barrel and natural gas went from $14 to less than $3 per thousand cubic feet. Investment banks and law firms have moved in and out with the ups and downs of commodity prices and the deals that result from them.
"From 1985 to 2000, everybody hated the energy business. It was backwater, and people who were smarter went to tech and healthcare," says Ralph Eads, who has been doing energy investment banking for 30 years, currently at Jefferies & Co. "A combination of commodity prices and a renaissance in the U.S. has made it one of the most active investment banking areas."
Steve Daniel, global co-head of energy investment banking at Goldman, Sachs & Co., who has been in the firm's Houston office for 13 years (where his first deal was the separation of EOG Resources Inc. from Enron Corp. in 1999), agrees. "Back then, we had low oil prices, and there was a little bit of a pall; clients were in dour moods, and technology was hot. Now we're at the opposite end of the spectrum; there's euphoria in energy corporate suites, having come through the crisis, and the activity level is at record highs," the Canadian transplant says. "The good thing about the energy business is, even if you're at a low point, there's plenty to do, and when it's hot, there's even more."
Indeed, the energy business has always been a deal business, with assets changing hands from property owners to wildcatters to developers to the majors and then back to independents who want to wring out the last drop of oil or gas. So when oil and gas prices are rising, buyers are chasing deals on the way up, and when prices are down, there are plenty of distressed sellers looking to get rid of their properties.
Houston dealmaking is on the upswing again, with oil prices above $100 per barrel, while natural gas prices remain low, but steady, at $4 per thousand cubic feet equivalent. But it's a little different this time. The belt-busting deals of the late '90s and early 2000s -- Conoco-Phillips, Chevron-Texaco, Exxon-Mobil and BP-Amoco-Arco -- have been replaced by a craze for shale deals, with foreign oil companies buying stakes in the most promising oil and gas developments in the U.S. in years. "Companies are not wanting to sell out of their positions, so they're doing joint ventures and sharing the risk," says V&E's Kelly.
The U.S. oil majors have also come back in, with Exxon Mobil buying XTO Energy Inc. last year for $35 billion, Chevron paying $4.3 billion for Atlas Energy Inc. and picking up properties in West Texas' Permian Basin, and ConocoPhillips scooping up leases in South Texas' emerging Eagle Ford Shale. "We're seeing majors come back when they had previously divested themselves of the lower 48," Latham's Dillard says.
Chris LaFollette, an Akin Gump partner who worked on energy transactions in Houston for 30 years, says another change has been the opening up of capital markets to energy and the sheer size of deals. "I was looking at one of my bound volumes, and as a young associate, going to the capital market for $30 million was a big deal. Now they have a 'b' in them," she says.
Dillard says it's also the speed with which you can now get capital markets issues through the system. "We'll get a call on a Monday morning, the client wants to go into the market the next morning, and it closes on a Friday. And we're talking about large issuances," he says.
LaFollette says the expansion of buyout firms into energy also changed the industry, giving it a great resource for funds directly to startups and for growth and expansion. "It's added an incredible dimension to our ability to access resources," she says. Eads agrees: "Firms like EnCap have created the ability for an entrepreneur to set up a company, buy some assets and build some wealth. That business is really only 10 years old."
Energy has always been a global business, with U.S. oil majors and independents pursuing projects around the world. But the entrance of foreign oil companies into the U.S. has forced many of Houston's energy bankers and lawyers to become internationalists, with everyone from the better-known names such as BP, Royal Dutch Shell and Statoil ASA to lesser known companies such as India's Reliance Energy Ltd., China's Cnooc Ltd. and South Korea's Korea National Oil Corp. trying to get a piece of the shale action.
"We went for 20 years with very little investment by non-U.S. companies; it was considered to have mature basins and not much to do," Eads says. "Since then, there have been nine deals, and we did eight of them. It's been a sea change, taking the U.S. from a second-class citizen to the top of the heap."
That's resulted in international companies opening offices in Houston and people "doing a lot more cross-border deals," says Abib, whose mandate is to make sure he has experienced bankers in every international market in which oil and gas deals could happen. "There are a lot of people looking to buy resources, and there's intense competition," he says.
Steve Trauber, a longtime Houston banker who is now at Citigroup Inc., says he finds himself overseas a lot more in the new environment. "You need to have a deeper insight into what's going on on a global basis because our clients want to know what's going on around the world," he says.
Private equity firms are thirsty for assets, too, with the cost of capital down and the feeling they can compete with strategic players. "Private equity is definitely more crowded, in the sense that you now have tens of billions of private equity money dedicated to the sector," says Bobby Tudor, a former Goldman energy banker and now CEO of Tudor, Pickering, Holt & Co. LLC, which burst on to the scene several years ago and has grabbed a lot of the advisory work. "It's what's driven values up and returns down, but we still think there's a lot of opportunity."
Indeed, 15 years ago, most buyout firms were investing in debt, warrants and overrides to get equity exposure in energy. Now they're backing management teams who later acquire assets. "Teaming up with management and taking an equity risk to acquire assets, you didn't really see much of that in the oil patch before we started doing it in 1988," says NGP's Ackerman.
To do that, relationships are all the more essential, which makes being in Houston, where most of the action is, very important. About 60% of NGP's current investments are with management teams it has backed once or even twice in the past. "We're always looking for the management team first and the assets second," Ackerman says. "The challenge in our business is finding the next great team."
Wil VanLoh Jr., president and CEO of Houston-based Quantum Energy Partners, which he co-founded in 1998, says buyout funds have also gone further out on the risk spectrum. "It used to be that all they would buy would be proved producing properties, with long lives and stable cash flows," he says. "Now investors are figuring out how to invest in technologically driven plays, like shale and coalbed methane. It's a rapidly evolving business, and it brings more optionality into the business."
The funds have also grown bigger, as NGP's have gone from $100 million in 1988, to $4 billion with its last fund, to another $4 billion with the 10th fund that it's raising now. "The price of poker has gone up in the oil patch as commodity prices have risen, [but you can] still find plenty of deals with compelling returns," Ackerman says. "But deals are [also] larger now so you've seen private equity funds grow to keep up."
Tim Day, a managing director in the Houston office of Greenwich, Conn.-based energy-focused buyout firm First Reserve, which has been doing deals since the mid-'80s, agrees. "When I started, there wasn't anyone who would write a $500 million check, and if there were, you'd have to go to New York to find them," he says. "What hasn't changed is relationships, and Houston is where the action is. I see them at the ball park, at charity functions, on the golf course. It's very powerful."
Day offers the example of Bob Phillips, the ex-CEO of midstream companies Enterprise Products Partners LP and Gulfterra Energy Partners LP, whom he met seven years ago and would see out in the community. So when Phillips was looking for funding for his new venture, Crestwood Midstream Partners LLP, he sought out Day. (Last summer, Crestwood did its first deal, buying Quicksilver Gas Services LP for $773 million.) "Those kinds of relationships are hard to develop without a presence here," he says.
As the private equity environment has grown more crowded, so too has competition for investments and for divestitures, says Townes Pressler, a Houston native and a managing partner at Lime Rock Partners in Houston, which does smaller deals in the oil patch. "Deal terms have gotten more aggressive and more favorable to portfolio companies, generating better terms for them," he says. "And now with everyone with over $1 billion funds, no one wants to do $20 million deals. They want to do $100 million deals. It's made it harder to get little deals done."
While there are a lot more opportunities for private equity firms, Pressler says it's harder to differentiate between them in such a heady market. "Is the reason for the individual's success based on their performance or an increase in commodity prices or an increase in acreage prices?" he asks. "It's harder to make money in a $4.50 gas environment than $12, and it's harder to make money when you have to invest $10,000 to $12,000 per acre than $2,000."
While the types of deals are leaning toward shale, NGP is staying away from it, finding plenty to do with conventional natural gas assets, which many companies are dumping at low prices to focus on more unconventional assets. "We haven't found the need to specifically target shale assets," Ackerman says. "They are capital intensive: You have to spend millions of dollars on acreage and drill $5 million to $10 million wells before you know what you have. Taking that kind of risk is not something we feel we need to do to make money," he adds. "Call us contrarian, but we know we have the ability to make money with conventional assets. The key is to invest in assets that have competitive finding and development costs."
The digital age has obviously helped energy dealmakers by providing every kind of imaginable data. But Tudor says it's what companies do with that information that makes the difference. "There's so much more good information available to people that it's changed the role of the investment banker a bit," he says. "It's less about having information than what you do with it and how much incremental value you can add. It used to be enough to have a basic understanding of the energy business and the capital markets, but that's changed. Clients are looking for technical information from their bankers."
What's next? While Houston energy bankers generally expect a lot more shale joint ventures to come with foreign players, some see U.S. companies as possible merger candidates: Companies with infrastructure like natural gas processing plants, pipelines or export facilities and/or the know-how to build them are becoming tastier; contrarians buying conventional natural gas or taking their companies private to wait for the day when natural gas demand, along with prices, picks up; and oil services companies continuing to gobble up smaller rivals to add new products, services or technologies. "There's not a quiet sector in the oil industry right now," Abib says.
Tudor says one area getting a lot of attention is intelligent fracking, where companies drill adjacent to rock that flows the best rather than setting wells at regular intervals, which involves digital core analysis. "Technology matters," he says. "As we've seen in shale gas, it was not the discovery of shale that made this happen, but drilling and completion technology."
Swyka says M&A continues to be driven by public companies looking to add synergies, but most of what he's seen change is technology. "We didn't have much in the way of technology going back 10 to 15 years ago. But with the entrance of subsea exploration and fracking, we deal with companies that deal in technology today," he says.
The financial crisis helped full-service banks like J.P. Morgan, Barclays and Goldman Sachs become more powerful in energy dealmaking because they could provide advice as well as capital when funding was hard to come by. But it hurt the boutiques that had expanded into energy and couldn't compete, which could be a warning sign this time around. "There's double or triple the number of energy investment bankers than there used to be, which is probably more than we need," Pipkin says. "There will probably be a shakeout at some point."
There's also been a changing of the energy dealmaking guard at the big banks. Longtime Houston energy bankers Abib, Tim Perry and Greg Weinberger are still at Credit Suisse, and Tom Langford remains at Morgan Stanley, but Goldman Sachs is losing Bill Montgomery to Quantum and Ray Strong to Evercore Partners Inc. (which established a Houston office with its hire of Rob Pacha from Bank of America Merrill Lynch in 2009). Meanwhile, Michael Johnson and Jonathan Cox left Deutsche Bank AG for Morgan Stanley; Trauber, Michael Jamieson, Jerry Schretter and Sam Pitts left UBS for Citi; and Oscar Brown joined BofA as head of the Houston office from Barclays. While Goldman and J.P. Morgan typically preside near the top of the league tables, that might change.
What haven't changed are the relationships that Houstonians require before signing on the dotted line, which can be forged in meetings, over breakfast or lunch, or at the many charitable events that several oil companies are involved in. "There's nothing better than continuing to build deep relationships, so you can be in boardrooms in the center of difficult, thorny conversations about where to go strategically," Goldman's Daniel says. "If you think only in the interest of your client, the trust develops, and then the job becomes straightforward."
Pipkin thinks relationships are even more important than 20 years ago: "You end up interacting more with clients because of technology than you did before. But the personal touch is still very important."
Eads agrees. "It's a very clubby business. You have to know everybody, and reputation counts. You have to build a business on relationships. E-mail made it more higher touch than it's ever been."
LaFollette learned this early when a client invited her to go to drilling school with him. On the last day, they simulated a blowout. "I was the only gal in a hardhat, and my eyes got huge. 'Are you sure this is a test?' I asked. And my client said, 'I want you to remember this when we're on a platform, and you're in your fancy office, and I call. I don't want a secretary to tell me you're not there. I want you to pick up the phone.'?"
What could derail energy dealmaking -- and by extension Houston's? The Federal Reserve could raise interest rates, the Middle East could descend into further chaos (notably Saudi Arabia), the Environmental Protection Agency or individual states could halt unconventional drilling, or commodity prices could dramatically correct. "That could chill things for a while," Tudor says. "Buyers do chase the forward curve up, but sellers don't chase the forward curve down."
For now, business is good, and Swyka says Simmons, despite being one of the first on the Houston scene, is continually cultivating relationships by stepping up calls to current and potential clients now that the age of "trusted adviser" is over and "beauty contests" prevail. "Being one of the first firms has helped," he says, "but there are a lot more people doing it now."