Energy IPOs: A New Blockbuster on Wall Street

Energy IPOs, and the banks underwriting them, are red-hot

Hugh McGee, co-head of Lehman Brothers Holdings Inc.'s global energy practice, is busier than ever. McGee and his team of 45 bankers are working weekends and nights. They're canceling vacations. And they're hitting the road to deliver a simple message to energy company CEOs: Dot-coms are out. Power is in. "We're telling them that it is a favorable environment for getting transactions done, and the financial markets are wide open," McGee says.

Welcome to the latest new new thing on Wall Street. So much for the tech boom; like McGee, legions of energy bankers are drilling for deals these days. And many are striking it rich. On May 1, Reliant Resources, a Houston power generating and trading spin-off of utility Reliant Energy Inc., raised $1.56 billion. It was this year's third-largest IPO, after Agere Systems and KPMG Consulting Inc., respectively. Up 10% in two days, Reliant could also climb to the ranks of this year's best-performing IPOs. Already, shares of Williams Energy Partners have soared 55% since its February offering.

THE RUSH IS ON. All told, Wall Street raised a stunning $3.6 billion for energy companies, including Reliant, Allegheny Energy Inc., Calpine, and Aquila Inc. in a spate of initial, secondary, and convertible equity offerings over the seven days ended April 30. "This is the strongest equity market for new issuance that I've ever seen" for energy companies, says Doug Kimmelman, chairman of Goldman, Sachs & Co. global energy investment banking group.

The reason: With America on the brink of its worst energy crisis in a decade, the long-shunned oil and gas business is gushing profits, making it suddenly sexy to investors and bankers. Players ranging from oil company Anadarko Petroleum Corp. to independent power producer Calpine Corp. are racking up record earnings. "Energy has replaced technology as investors' favorite sector," says Richard Peterson, chief market strategist at Thomson Financial Securities Data Corp.

Indeed, energy is now one of the few sectors still greasing Wall Street's wheels. In the first four months of this year, Wall Street earned almost as much in fees from issuing equity for oil, gas, and utilities as it did from technology companies over the same period. Investment bankers pulled in $266 million in disclosed fees from issuing equity for oil, gas, and utilities vs. $351 million from technology issues.

"UNPRECEDENTED." And this is just a fraction of what Wall Street will earn financing the massive expansion plans to solve America's energy crisis. Credit Suisse First Boston expects energy-related companies to account for as much as 20%--or $30 billion--of an estimated $150 billion in equity that Corporate America will issue this year. They will also raise billions from loans and bonds. "We believe the financing requirements over the next few years will be unprecedented," says Jonathan Bram, a managing director in CSFB's global energy group. It has arranged more than $11 billion worth of syndicated bank loans for energy companies so far this year.

Energy companies are also filling up banks' merger-and-acquisition pipelines. No one expects a flurry of megadeals like the ones in 1998 and 1999, when Exxon purchased Mobil and British Petroleum snapped up both Amoco and Arco. Consolidation among the big players has gone so far that further deals would raise antitrust concerns.

But there are plenty of smaller deals to be done. Houston energy consulting firm John S. Herold Inc. estimates that oil and gas exploration companies are now peddling oil and gas reserves worth more than $40 billion. Some European players are also shopping for power companies to expand their reach in North America. Bankers believe London-listed utility group Scottish Power is considering a $3 billion bid for U.S. energy group Portland General Electric. "It's no secret we are looking to expand in the U.S.," says a Scottish Power spokesman.

Of course, the black gold rush may dry up if the nation's power supply catches up with demand; if crude oil or natural gas prices dip, investor enthusiasm could as well. Then Wall Street will undoubtedly move on to the next big thing.

By Emily Thornton in New York

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