Tariffs, geopolitical conflicts and OPEC+ production increases have created a volatile climate for upstream and midstream companies this year. Yet in the last several years, adoption of a newer fiscal discipline model has afforded companies a lifeline amid the turbulence, even in the event of oil in the $60/bbl to $50/bbl range.

For E&Ps looking to tread rocky water, Jeff Treadway, senior vice president and director of energy finance at Comerica Bank, says implementing a return to capital programs, whether it's through buybacks or dividends, is a top approach.

Industry strategies such as fiscal discipline, strong liquidity, strategic hedging and smart financing approaches have positioned companies to be able to withstand lower for longer, Treadway told Oil and Gas Investor’s Deon Daugherty at Hart Energy's Energy Capital Conference.

Hi, I am Deon Daugherty, editor-in-chief of Oil and Gas Investor, and I'm here in Houston at the Energy Capital Conference with Jeff Treadway, senior vice president and director of energy finance at Comerica Bank. He just wrapped up a panel on topics related to financing the industry, so we're glad to have him here for a few minutes to really hit home on some of the major issues that we discussed today. So Jeff, to begin with, what are the factors affecting the market and what's going to be the net impact when we look at things like tariffs, war and OPEC increasing production?

Jeff Treadway: Yeah, I mean those are the big three at the moment. Tariffs, turmoil in the Middle East and in Eastern Europe, what OPEC is saying and what they're doing, all these things are very much pushing and pulling on the market in a variety of ways. This type of turbulence, this type of volatility is nothing new for our sector, but I think you've kind of seen a lot of things come to a head over the last 90 days for a variety of reasons. It's made it feel a bit more, maybe a little bit more negative, a little bit more volatile this year than maybe in prior years when you're speaking to oil and that underlying commodity.

But I think the reality is the industry itself, the sector that we lend to, which is upstream and midstream companies, they've adopted a new fiscal discipline model. They've been operating under this model for the last several years, really dating back to even 2018 and 2019 for some folks. And it's afforded them the ability to deal with this type of volatility. And the volatility has certainly compressed oil prices down into the low $60s, even down into the $50s recently. But the fiscal discipline they have, the liquidity they've built into their balance sheets, the hedging profiles that they've set up for themselves, just the way they think about acquisition financing and property capitalizing if it's a private equity firm, properly using equity as part of their investment strategy. It's all, I think, set the industry up to weather this very turbulent time that we're in.

DD: Okay. And it is a very turbulent time, but as you noted, the industry is probably better set up than it could have been at any point in history. Following the investor pushback on growth's sake and whatnot, it really seemed to pull it all together really quickly, maintain that fiscal discipline and even initiate share buybacks other methods of returning cash to shareholders. But amid this volatility going forward, how long or what levers do they have? What tools do they have to maintain that fiscal discipline in this environment and return cash to shareholders? Can they do that long-term?

JT: Yeah, it's a great question and I think it's going to depend on the basin and the balance sheet that any given company has at this point in time. For the most part, like I said, the industry is well capitalized, with good balance sheets. The main toggles that they're going to turn on and off, the levers they're going to use are going to be the return to capital programs that they have, whether it's through buybacks or dividends. We've seen private equity firms and the big public guys, they've established dividends. Some of those have been more variable in nature. They can slow those variable dividends right now if they need to. They can slow capex spending if they need to. And we've seen that already start around the edges. You've seen the rig count fall for oil, you've seen the rig count stay steady for gas production. So I think the reality is the balance sheets and the fiscal discipline that has been adopted has set these companies up to be able to withstand lower for longer, which I think we may be entering into a period of that, and if we are, then we'll see how it plays out. But I think we feel strongly about the model that's been adopted, being able to weather this type of turbulence.

DD: Great. All right, well thank you for your perspective, Jeff, and thank you all for joining us. We hope to see you again soon.

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