Money Talks: BOK Financial on Bid-Ask Spread Challenges to M&A

Hart Energy queried banks across the U.S. oil and gas investment space to analyze the lending environment amid uncertain times. This exclusive interview with Cristina Stellar, senior vice president and managing director of energy investment banking at BOK Financial Services, is the final installment in a series with Oil and Gas Investor. 

Deon Daugherty, editor-in-chief, Oil and Gas Investor: What are your goals for working with the oil and gas industry during the next 12-18 months? What factors will influence your engagement?

Cristina Stellar, senior vice president and managing director of energy investment banking at BOK Financial Services: Our goal is to partner with oil and gas companies to help them with their financial needs: whether that is divesting a property, funding a new acquisition or development on the debt side, providing hedges, treasury services, etc.

Commodity price volatility affects both engagement origination and execution. On origination, most sellers want to wait until prices are more stable, slowing down deal activity (deals being marketed). On execution, it is increasingly difficult to close the bid-ask spread as buyers adjust their offers downwards.

DD: To what extent might macro uncertainty [policy changes, geopolitical upheaval, tariffs, OPEC, war] impact lending and spending in the upstream space? How does uncertainty factor into your decisions about which sector to engage?

CS: Drilling, production, and spending in general will decline as companies try to maintain/preserve returns to investors. We are expecting a decline in capital investment and production this year.  

As deal activity and development slow down, so does the need for lending.

DD: How are banks competing for clients as the E&P universe shrinks?
CS: With more favorable debt terms. The competition for deals has driven loan pricing for fairway well-capitalized borrowers downward across grids.

DD: How has consolidation impacted competition 1) for E&Ps seeking capital and 2) for their lending partners at investment/commercial banks?

CS: 1) There is plenty of capital available in the space. Recent exits and capital raising have increased the need to fund new teams. Capital is available on the debt and equity side from banks and sponsors.

2) Lending partners and investment/commercial banks felt significant payoff pressure last year. Nearly all energy lenders have been given budget directives targeting asset and loan growth, so they are hungry for origination.

DD: How do you view consolidation taking shape within the upstream and midstream spaces going forward? Has the asset market opened up sufficiently, and how do you expect it to perform in the short- to mid-term?

CS: In the short term, M&A&D will slow down due to lower commodity prices and volatility. Also, there is not much left to buy in some basins. In the mid-term, the market should open assuming relative price stability.

DD: To what extent is access to capital a concern? Many E&Ps have paid off debt, but has the consolidation trend made the sector more debt-heavy?

CS: Access to capital is not a concern (there is capital available). With a few exceptions, consolidation has not made the sector more debt-heavy. Most public companies funded the acquisitions with cash on hand, stocks, and occasionally bank and public debt. Exploration and Production companies are still focused on preserving their balance sheets and capital discipline.

DD: How is the RBL market responding to oil and gas? Has it become more accessible? What alternative options are most viable for a company that struggles to access cash via RBLs? Would unitranche financing and secondary markets grow in this environment?

CS: Lenders are hungry for deals, so the RBL market is extremely healthy and more competitive than it has been in a while.  

Alternative capital providers (whether unitranche, mezzanine financing, or private direct lending) are viable for upstream entities as banks signal more complex refinancing processes or retrench

DD: Is the upstream space appropriately funded? For several years, much of the sentiment said the space was underinvested in terms of producing enough supply for future demand. Has that changed, and if so, how?

CS: There is less funding in the space than pre-2020, but the concern now is oversupply in a slowing global economy with languishing demand growth. The capital needs are covered, and whether that change is to be determined.

DD: Investor sentiment appears to be strengthening toward natural gas more than crude oil in recent months. How do you view this dynamic and how might it impact E&P capital access?

CS: Gas companies are outperforming their oil peers due to the energy demand pull from LNG and AI. Gas has a demand growth story that we are not seeing for crude oil. Capital is available for both oil and gas entities.

DD: What opportunities are most exciting? What factors are most attractive when considering an upstream or midstream investment?

CS: There are not many deals in the market, so being able to transact in the current environment is both difficult and exciting. As far as strategies are concerned, when considering an investment, you have teams looking for large assets, mainly marketed, or teams looking for a lease and drill strategy, building up from smaller acquisitions into drillable units.