Simmons & Co. International An I-Bank With The Energy To Persevere

Matthew Simmons might be the only person these days who believes oil prices are inexpensive—about 11-cents a cup to be exact. “What else can you buy these days for 11-cents a cup?” he ponders.

Agree or not, it’s precisely that type of unconventional analysis that has afforded Simmons with success and renown in his field, not to mention President Bush’s ear. Simmons is the founder and chairman of Simmons & Company International, the largest investment bank dedicated solely to the energy sector.

Since 1974, Simmons & Co. has completed north of 600 energy transactions worth more than $85 billion, and has a lengthy client list that includes strategics and private equity firms such as Dynegy Inc., First Reserve Corp., El Paso Corp., 3i Group plc, The World Bank and Lime Rock Partners. Additionally, the Houston-headquartered firm boasts a market share of almost 70% of all the corporate finance deals done in the oil services industry over the last three decades. “We’ve got to be doing something right,” Simmons jests.

Simmons’s belief that today’s oil prices are “cheap” stems from his view that for the last 50 years energy has been trading at prices that were “basically free,”—a factor he says that has contributed to the deteriorated state of both our energy infrastructure and supply.

“Cheap” as they may be, oil prices are on the rise, with no relief in sight. “The next little emergency we get, we’ll be over a three-digit price per barrel before you know it,” Simmons says.

With oil prices currently above $76 a barrel, combined with a severe tightness in supply, Simmons predicts an upcoming boom in infrastructure renewal and E&P projects that could give investors in the sector a field day.

“Energy is the largest industry on earth by a factor of almost four times,” Simmons says. “As we finally accept the struggle to do everything possible to try to stabilize the supply of an un-renewable commodity, and also rebuild the industry at the same time, it will cause trillions of dollars of spending—and out of that, the companies that are best postured are going to make a fortune.”

Simmons was not raised in oil-country and never went to school to become an energy expert. That said, his recent book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, is being translated into German, Chinese, Japanese and Korean, making him among the world’s foremost experts on the subject.

Simmons grew up in Utah, with business in his blood. His father, Roy Simmons, had spearheaded an investor group to buy control of Zion’s First National Bank for the Mormon Church. When Simmons left Utah for Harvard Business School in the fall of 1965, he already had his future mapped out: after obtaining his MBA, he would spend two to three years with a New York investment bank before returning to Utah to become his father’s understudy.

“I had an acute interest in finance, but energy or international studies were not even on my radar,” Simmons says.

Shortly after graduating, Simmons took his I-banking job with First National City Bank (known today as Citigroup), and was on his way to fulfilling his predetermined future. Up until then, his only exposure to the energy market was a class he took at Harvard called Advanced Production Problems. But that proved to be enough to alter his life’s course. After only three months at City Bank, Simmons’s former professor—impressed with his performance in the class—recruited him back to Harvard as a member of the faculty to write case studies.

In his spare time, Simmons kept busy, moonlighting as a money manager for wealthy investors and cobbling together a few small venture deals. “That’s when going back to Utah and being a commercial banker just didn’t have the intrigue it did four years before,” he says.

It was during that phase of his career that Simmons met Lad Handelman—a deep sea diver and founder of a small diving services company called California Divers—and his life became forever fused with energy. Simmons raised $350,000 of venture capital for California Divers, giving the small privately-owned company the wherewithal to grow through acquisition and become what is today called Oceaneering International Inc (NYSE:OII). Simmons credits that deal in particular with permanently embedding him in the world of sub-sea services to the offshore oil and gas industry.

In 1969, Simmons left Harvard to pursue his moonlighting activities full-time, and by the fall of 1973 he was spending most of his time working on projects for companies that provided services to the offshore oil and gas sector. The idea to open up an investment bank exclusively focused on the energy sector stemmed from the 1973 oil crisis.

“It was obvious to me that this was going to profoundly change the service companies, so I worked up a business plan, made the move to Houston, raised the necessary money… and opened the doors to Simmons & Co. on May 1, 1974. The goal was to specialize on companies that were offering services and products to the oil and gas industry, and provide the best analysis, period.”

Over the years, Simmons & Co. grew to be a flexible firm that could change with the times, a factor that proved invaluable as it traversed the energy sector’s turbulent path. In the boom years of the 1970s, Simmons & Co.’s business was primarily M&A work, as consolidation abounded. But that changed in 1982 when the energy industry fell victim to a prolonged downturn that lasted until late 1989. During that time the firm focused on bankruptcy workouts and debt restructurings, and 90% of its projects during this stretch were totally cashless transactions, Simmons says.

At the outset of the industry’s 1989 recovery, Simmons & Co. formed a captive private equity arm called SCF Partners, which was headed by Simmons’s brother, L. E. Simmons. That proved to be a short-lived marriage, since by 1992 SCF had grown large enough that it was considered a conflict of interest and was spun off. Today, Houston-based SCF, which is still run my L. E. Simmons, has more than $1 billion under management and participates in transactions requiring equity stakes between $20 million and $100 million.

That same year, Simmons & Co. started underwriting initial public offerings and launched its institutional sales, research and trading operation. Three years later, in 1995, the firm redefined its industry specialization from “service and equipment for the oil and gas industry” to “total energy services.”

“The only area we’re still gearing up in, from a corporate finance standpoint, is the alternative energy arena, which we just started research coverage on a year and a half ago,” Simmons says. “But I would think within two years that that will be a major part of the firm, too.”

Most recently, the investment bank completed a succession plan that secures its continuation in the generation to come. In 2005, Michael Frazier, who had been named president and COO of Simmons & Co. just three years before, took over Simmons’s role as CEO. Frazier joined the firm in 1993, shortly after it opened its securities arm.

Today, Simmons & Co. has 91 professionals and a total of 141 employees, making it the largest investment banking practice specifically devoted to the energy industry. The firm currently has locations in Houston and Boston, and an international presence in London and Aberdeen, Scotland. Simmons also has plans to open new locations in both China and the Middle East.

To Simmons, his firm’s growth and longevity has been a ride beyond his expectations. “If somebody would have told me… that we’d be one of the only independent investment-banking firms founded in the 50s, 60s, 70s or 80s that survived, I would have told them that they were crazy,” Simmons muses. “And the fact that for about 23 years of our existence we’ve operated in an industry that’s in a depression speaks volumes to the commitment and abilities of all the people that have helped me build [Simmons & Co.]”