Back in the day, geopolitics-induced commodity volatility would send oil prices skyrocketing, infusing fresh capital into the oil business.

Models focused on year-on-year production growth dominated.

The banks were welcoming.

Competition for capital was amongst peers.

Unchecked, many oil companies overspent and underdelivered—again and again and again. Investors, of all kinds, forgave.

Welp, times are changing.

“We’re no longer an allocation today. We stunk it up. We had a big, huge red problem. We lost a lot of money. We’ve got the green problem … that we’re going to have to deal with,” said Chuck Yates, podcast host and panelist at the International Petroleum Association of America’s recent Private Capital Conference. “If you’re sitting there with an oil and gas company and you want capital, do not sit there and go, well, ‘I’ve got PDP and PV-10 … All those old rules are out the door. You have to walk in to an investor and show how you uniquely can make money.”

The competition, he added, includes Apple, Google and other technology stocks.

Today, an oil company’s ability to attract capital—as consumers push toward a lower-carbon world—is not just about generating returns, growing cash flow and staying disciplined financially. It also hinges on ESG, longer-term goals, reclaiming the narrative and uniquely creating value, according to experts who shared perspectives on transitions of the past and present during the conference Jan. 20.

“And we need to get back to understanding our assets and clarifying that we’re drilling the right assets for the right reasons,” said Samantha Holroyd, owner of Golden Advisory Services.

Part of the return on capital will be integrating the ESG component, Holroyd added, which also makes companies attractive to potential partners and buyers. “The key here is remembering where you are in the ladder of capital flow. What are your targets? What are your objectives?”

Be it a 10-year vision or a three-year exit, strategies are needed to ensure all boxes are checked concerning not only return of capital but also integrating it all into operations and analysis, she said.

The allocation of capital on both the public and private exchanges has dropped to the low-single digits, from the 10%-15% range, she said, adding focus must be on return on capital.

Panelists seemed to agree that oil will still be needed despite the growing push for an energy transition.

“You’ve got to use your capital to generate revenue and you do that by drilling development wells, exploitation wells,” said Jim Trimble, owner of Tanda Resources LLC.

As oil exploration continues to fall—leaving voids in the areas of large seismic shoots, acreage plays and discoveries—he sees oil prices rising as supplies get tighter.

“Exploration is something that has just gone away,” Trimble added. “Until we can figure out how to have that as part of our portfolio, production in the U.S. will start declining.

There is plenty of room for responsible growth companies that are generating free cash flow, keeping debts low and are socially responsible, according to Frank Lodzinski, executive chairman of Earthstone Energy Inc.

“To attract the capital, I think we’re going to have to show folks that we are financially disciplined—that there is growth there, but it’s responsible growth in terms of what we do,” he said.

New Cards in Game

“ESG is one of the new playing cards in the capital game, and you will need to find your hold cards,” Holroyd said. “You’ll need to find a way to make ESG relevant in your business. I think in our particular business, we need to start with the two easy ones: carbon management and social, or our impact to our communities, to our people and the communities in which we work in. Governance should be easy and governance will help you get to those solutions.”

Speaking on the environmental aspect of ESG, Lodzinski said carbon management can also make companies attractive to potential buyers.

“In the event you’re going to build something and sell it off to a bigger company, they’re not going to want to go backwards on their ESG criteria,” he said. “So, the add is not only production, good cash flow from operations ... but field-level ES&G and carbon emissions.”

While ESG issues involving the industry have driven a lot of banks—mainly in Europe, Canada and the U.S.—out of the market due to mandates by their boards not to invest, not all banks are exiting.

“The Asian banks are all hungry to get into this market,” Trimble said. 

‘Constructive’ Transition

Those in the business may feel caught up in a whirlwind of change. But some things like regulatory changes, evolving tax policies and inflation aren’t new.

“That was there in the 70s,” Lodzinski said of inflation. “The key is how do you survive over time to operate profitably or at least in a manner where you can sustain your operation and your debt service and some level of capital.”

Panelists agree that it’s about responsible investing and responsible management.

And perhaps it’s better to plan pessimistically, instead of optimistically, “and enjoy the benefits if things turn around faster,” acknowledge what you don’t know; attract and retain young talent; reclaim the narrative; and find “green angles” to oil and gas opportunities,” panelists said.

“Just show everybody that you can generate free cash flow and be environmentally conscious at the same time,” said Lodzinski. “Nothing has really changed, except over the years there’s a much greater national and investor focus on the whole ES&G thing.”

Yates also pointed out that young people believe it is important to work for companies that look like America. “I hate to call our industry out, but we don’t look like America,” he said. “We need to give that a lot of thought.”

The industry needs to step up and say it knows what is needed to evolve the energy business, Holroyd added.

“The key to the future for our business is youth, and I really hope that we find ways to make them curious about us, have them bring their thoughts and their ambitions and their behaviors and their learnings, and teach us how to be better oil and gas people,” she said. “I believe the future is oil and gas transitioning to a broader power industry or energy industry, which includes alternatives. But we are going to have to be a constructive commercial solution, and the people sitting in this room have to be leaders in that transition.”