Oil, Gas Growth Banking is Coming Back in Vogue

Bank capital is returning to U.S. oil and gas with lenders offering larger commitments on friendlier terms than recent years.

“From an operator perspective, this is probably the best banking market since pre-COVID,” said Matt Chase, senior vice president at BOK Financial—one of the nation’s most active lenders to the oil and gas sector.

Traditional reserve-based lending (RBL) remains active and open for business, he said.

New faces are entering the sector, like regional banks and larger super-regionals and money-center banks targeting the middle market.

“I think all the banks are willing to hold more than what they might’ve just a few years ago, in terms of commitment amounts,” Chase said during Hart Energy’s DUG Appalachia Conference & Expo in Pittsburgh in late August.

George McCormick, founder and managing partner at private equity firm Outfitter Energy Capital, has watched the lending market rebound sharply in recent years.

Outfitter, a consumer of bank debt capital, found it was “exceedingly hard” to assemble small bank “club” deals unless the borrower had very strong credit.

Around two years ago, banks refused growth loans to energy companies outspending cash flow, underscoring the sector’s conservative stance, said McCormick, who previously led the private equity business for Tudor, Pickering, Holt & Co.

“And I said, ‘We don’t finance working capital in the upstream business. We get paid faster than we pay our bills,’” McCormick said. “‘We don’t need a working capital loan. We need a growth loan effectively.’”

But that’s started to change now. Chase said banking capital has shifted from outright avoidance to competition, particularly to get into quality natural gas deals.

“Five, seven years ago, northeast gas was like, ‘If you make me do it, I’ll do it.’ The RBL space might have taken that approach to it,” he said. “And that’s shifted now too, of course.”

Equity capital is returning cautiously

As debt markets warm up to oil and gas, equity markets are active—yet remain well below the heights of the shale boom.

“We are not back to where we were 10 years ago,” McCormick said. “There aren’t as many investors now … on the equity capital side.”

But that’s probably a good thing, McCormick noted: “We took too much capital, and we know what happens in commodity markets when you do that.”

The shale boom’s rush to drill ultimately led to over drilling, excessive leverage and repeated bankruptcy cycles that eroded investor confidence in U.S. oil and gas.

Only in recent years have U.S. E&Ps embraced ‘capital discipline’ and prioritized shareholder returns over chasing production growth in an already well-supplied market. And that discipline has lured back some institutional and retail investors.

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“We actually got a phone call last week from the first university endowment we’ve talked to in probably seven or eight years,” McCormick said, “and they were huge investors in the energy private equity space during the shale growth boom.”

Private family offices are increasingly targeting natural gas for capital deployment, said Brad Nelson, a managing director at financial services firm Stephens Inc.

“I would say most of the investors, 70% to 80%, are looking for gas-weighted stories,” Nelson said.

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