Money Talks: Comerica Bank is ‘Hungry’ for Oil, Gas Business

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 Jeff Treadway, director of energy finance, Comerica Bank, is the last in a four-part 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 to 18 months? What factors will influence your engagement?

Jeff Treadway, director of energy finance, Comerica Bank: The overall goals for our energy portfolio: we want to grow loans, we want to grow deposits, provide other ancillary services, and we want to do that with new relationships and our existing customers.

At a high level, we’re hungry. We’re ready to do business. Credit quality is really strong. We’re very comfortable lending into the sector. But there’s many factors at play right now that the industry is navigating. We want to engage in new opportunities, but those opportunities have to materialize, and I think it’s going to be challenged in the near-term. We’re still very supportive of the industry and want to grow.

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?

JT: Spending has been muted for years now under the disciplined model that the sector has adopted. And I do think that’s probably going to continue, as I don’t see anybody ramping spending right now. M&A is challenged, asset level transactions are challenged just given all the upheavals in the market of late. There’s a lot of uncertainty right now, and that uncertainty is driving volatility, and with that, it’s slowing down deal flow. We’re definitely seeing that. It’s been a fairly quiet start to the year. But how does it factor into our decisions about engagement? We’re used to volatility in the energy business. We’ve got decades of experience of lending through various cycles. Back to what I said a second ago, when deals materialize, we’re ready to engage.

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

JT: I think those are two key things that I think kind of gets you into a fairly balanced market right now. I think there is sufficient capital in the market for deals to get done should they materialize. I don’t think we expect that to stop. We think it’ll be a continuing theme in ’25, maybe not at this very moment, just because of the volatility and probably not at the pace that we saw in ’23 and ’24, just given the magnitude of deals that were done in those years. But there’s just less out there to consolidate than there was before. But by and large, banks have had a lot of payoffs. A lot of good clients go away through consolidation, and we’re all kind of hungry for new deal flow to replenish what was lost.

I do think because of the payoffs and those headwinds, banks do have maybe additional capital available that’s freed up as a result of that. For the most part, when I talked to bank peers, we’re all hungry for flow, which is not there yet.

I think you go back to the disciplined spending mode of the consolidators. They’re not growing production. They’re seeking limited growth, if any. They’re living within cash flow, returning cash to shareholders, it’s well-documented that private equity coffers have replenished to some extent over the last couple of years. And should they find acquisitions or find development projects, I think banks are ready to go there.

The overall demand for U.S. crude, we think, is going to increase in the years ahead, but meeting that demand under this kind of discipline spending mode that the industry is in will be an interesting challenge … we’ll have to see how it’s navigated. It’s largely going to be driven by the commodity price and at the current price levels that we see today and that we’ve seen over the last several quarters, you wouldn’t expect growth to really ramp at those levels. And candidly, if prices do run, you’ve seen companies take the benefit of that additional cash flow and just return it to shareholders and not grow production.

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?

JT: We call it asset rationalization. It’s happening. We expect there will be more, but I do think it’s probably not at the level that we might’ve thought it would be given nearly half a trillion dollars of M&A volume over the last five years.

The reality is the consolidators want and need the inventory, and they’re not going to part with it easily. A lot of the M&A [was] done on a leveraged neutral basis. Their balance sheets are really strong. They don’t need to sell assets to pay down debt. By and large, that is the case. There are certainly some companies that have announced and are executing on some divestiture goals. We’ve seen that, but it just hasn’t turned into a tremendous amount of asset level deal flow yet. But we expect there will be kind of a steady trickle of that, I guess you could say.

We do see M&A continuing. It’s just going to be hard to match the pace of the last several years.

You may see some very large M&A transactions that might skew it upwards from a dollar perspective. But in terms of number of transactions, you just have fewer consolidators. Private equity is still trying to deploy the capital they’ve raised over the last several years, and until they do that and build those portfolio companies, you’re not going to have private equity-backed businesses to sell to the consolidators. But yeah, M&A, I think it’s not going anywhere. But again, it’s kind of hard to imagine that it would match the pace of the ’22 to ’24 time period.

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?

JT: I think about a 1% projected demand growth like OPEC can fill that theoretically. I think this sector today is probably appropriately funded given the way it’s operating. It’s operating under a discipline mode of living within cash flow and limited growth. I mean, a lot of these companies are self-funding. They don’t really need to borrow money. They’ve got enough cash flow to fund their business.

I think it is pretty appropriately funded. If there was ever a point where we needed to grow production by a significant amount, which the [Trump] administration kind of wants … I think that’s challenged for a lot of reasons. You’ve got to have an effective commodity price. You’ve got to have companies willing to tell their shareholders that we’re changing course, and we just haven’t seen that happen yet. I think, for now, it’s fairly balanced.

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