Independent oil producers couldn't have picked a better day to come to the world's financial capital.


Independent Petroleum Association of America's

annual investor symposium started Monday at midtown Manhattan's

Sheraton Hotel and Towers

, and Wall Street celebrated by pushing up oil stocks.

OK, so the apparent rotation by money managers into cyclical stocks from growth stocks may have had something to do with it, but regardless of the reason, the upsurge gave the conference an air of optimism.

More than a year of depressed oil prices had the industry in the doldrums, with little hope of recovery. Then, in March, oil prices surged to nearly $17 per barrel from a low near $11 after


and some non-OPEC producers agreed to cut production by over 2 million barrels per day. The cuts are expected to eliminate much of surplus inventory by the end of this year.

Still, today's higher oil prices and surging oil share prices can't erase the damage inflicted on the independent oil and gas sector from over a year of depressed prices. Many companies piled on debt over the past two years and are feeling squeezed by their lenders. So given the tough times, more and more independent oil companies have gone to the private equity market for capital infusions as other avenues of financing have closed.

There are 20 to 25 institutions putting equity capital into the upstream, or exploratory, sector, up nearly two-fold from just a few years ago, estimates Frank Weisser, managing director of

Weisser Johnson

, a New York-based private equity firm.

Even with the plethora of private equity options for well-run companies, they may be better off trying the public markets first, according to one managing director at a private equity fund.

"Quite frankly,

the public market is usually the best form of capital," said Jonathan Farber, a former

Goldman Sachs

investment banker who last September helped start

Lime Rock Partners

, a $200 million energy investment fund. The lack of restrictive covenants and flexibility offered through public equity are its greatest advantages, Farber said. Its biggest disadvantage it that the window of opportunity can slam shut quickly in industry downturns, especially for smaller companies.

To fund exploration projects, companies should first look to their own coffers, he said. Since it is internally generated, this is actually the lowest cost capital a company can find, and lets the company retain its autonomy. The problem? In order to grow, an oil company must outspend its cash flow. So the company has a few other choices: take on a partner, go to the public markets, or go to the private markets.

Taking on a partner reduces overall financial risk, Farber said, and can bring in expertise and technological know-how to a project. The disadvantages, however, may outweigh the advantages. What many companies do not realize when taking on partners, he said, is that the company is, in effect, selling its own intellectual property to its partners.

So is private equity the answer? Even with the 20% plus returns private equity firms often seek, the advantage in using private equity is in the flexible structure of a deal. Also, importantly, companies retain their own intellectual property. Lime Rock's time frame for seeking a return is up to 11 years, Farber said, which lets the firm ride out the cyclical ups and downs of the energy business.

Sheer luck can play a major part in determining an oil and gas company's drilling success. Barring that, the two most important elements are solid geological and engineering skills and a keen understanding of the risks and rewards involved in adding reserves through a strategy of exploration rather than acquisition. Also important is a strong asset base and a technological edge. So says James McBride, vice president of producer finance at

Enron Capital and Trade Resources

, a unit of




With $1.5 billion invested in assets stretching from Canada to the deep water Gulf of Mexico and from California to Appalachia, Enron Capital and Trade, one of five major businesses within Enron, is a "virtual" oil and gas company, McBride said.

ECT is a relative newcomer to funding the exploration sector of the oil industry, McBride said. It looks for companies that grow through exploration, not acquisitions, because the market rewards growth through the drill bit, which is typically more explosive.


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were among the few companies he mentioned that are successful with exploration efforts.

Since exploration is such a high-risk business, McBride had a word of advice for companies seeking a financial partner in the private equity world. "Make sure your financial partner can truly tolerate risk," he said. With a pure exploration play, "there is always a chance you won't get your money back."