MIDLAND, Texas—Over the past two years, the energy industry has seen over $300 billion in consolidation deals, which have understandably shrunk the pool of players in the oil and gas industry.
After all of the big splashes from those deals, the financial firms providing the capital behind those deals have dried up too, said Art Krasny, co-head of upstream coverage and A&D for Wells Fargo.
“The (energy) industry consolidated quite a bit and continues to consolidate,” Krasny said. “And if you take a step back and think about the capital markets, they've changed along with the industry.”
The private equity space has contracted around a smaller lineup of firms that represent about $20 billion to $30 billion of dry powder capacity, he said. The reserve-based lending, or RBL, market used to be 50 or 60 banks strong.
“Today, it's 25 to 30 banks,” Krasny said. “And yet they’re able to support meaningful commitments.”
Krasny discussed the capital funding the energy sector during Hart Energy’s Executive Oil Conference & Expo panel on Nov. 21.
Panelists discussed how financing has become much more focused following the ups and downs of the shale revolution during the last decade.
“The criteria the banks are looking at for companies have evolved over time,” said Scott Wilson, senior vice president and energy relations manager for Midland-based West Texas National Bank. “When you have a contraction, as we did over the last 10 years, you readjust and work with and try to work with the customers and help them get through the process at the same time.”
The period from 2014 to 2020 saw a great deal of capital destruction in the energy sector, said Jeff Treadway, senior vice president and director of energy finance for Comerica Bank. The financial institutions that survived the period had to re-think their businesses practices.
“You just see so much more thought in acquisitions these days from a financing perspective,” Treadway said. “There's more equity being put into deals, leverage is much more manageable, liquidity is prioritized, hedging is very real.”
Distributions now are a part of most business deals and adjust to the economic situation of an investment project, Treadway added. The current procedures allow investors to be cautious while supporting new deals.
“All those things are just discipline … that we'd like to see,” he said. “And it's, it's been really constructive.”
In turn, the source of funding has changed along with the practices. Treadway noted that private equity is returning to the oil and gas market, but in a different form than at the beginning of the decade.
He said he has not seen the major financial institutions — coastal endowments and pension funds — returning to the sector. In that space, however, family offices and new investors are filling in the gap, thanks to the continual strong returns the industry has shown over the last four years.
“We can be turning back in the direction of private equity fundraising that we saw 10 [years] to 15 years ago,” he said. “Are we ever going to get back to 50 or 60 private equity firms and hundreds of billions of dollars of dry capital? I don't think so, but I think there's more to be had.”
The panelists agreed that, thanks to financial discipline and a more educated investment sector, the financial branch of the oil and gas market is showing stability. However, the next phase of the oil and gas cycle will eventually force financial firms to re-think the rules again.
“I think the next evolution I — I don't want this to happen, but we know it will — will be on another downcycle, another testing of our portfolios and everybody's business models,” Treadway said. If the financial sector can maintain its discipline, “We’ll emerge from that hopefully unscathed, and then we’ll be in an exciting time. But we have to get there first.”
Recommended Reading
Bayou Midstream Secures New Equity Commitment from EIV Capital
2024-09-18 - Bayou Midstream II’s commitment from EIV Capital follows Bayou’s predecessor company's successful exit of Bakken infrastructure in 2024 to Bridger Pipeline.
Matterhorn NatGas Pipeline Ramps Up Faster Than Expected
2024-10-22 - The Matterhorn Express natural gas pipeline has exceeded expectations since its ramp up on Oct. 1 for deliveries to interstate systems owned by Kinder Morgan, Williams and Enbridge.
Tallgrass Holds Open Season for Pony Express Capacity
2024-09-23 - Tallgrass Energy is running a binding open season for commitments on the network’s terminal in southeastern Wyoming.
Sable Offshore Plans Restart of Subsea Pipeline After 2015 Shutdown
2024-10-08 - Sable Offshore Corp. says the permits needed to begin operations on the Santa Ynez line offshore California, which shut down due to an oil leak in 2015, are not yet in place.
Martin Resources Steps Up Offer for Martin Midstream
2024-10-06 - Martin Resources Management will pay $132 for Martin Midstream, which it had previously spun off, after a pair of New York capital groups counteroffered at a higher price.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.