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?

MC: We anticipate continued consolidation in both the upstream and midstream space as companies look for scale, inventory and efficiencies. With continued interest in certain basins, specifically the Permian, we expect A&D activity to remain prevalent there on both the upstream and midstream side. E&Ps are looking for drilling efficiencies via longer laterals, high-quality undeveloped acreage and benefiting from economies of scale. Midstream companies may find it is more accretive to acquire an in-service asset or one in which certain regulatory hurdles have been crossed by the target rather than start from scratch and endure what can be a 12 to 18-month process for certain permits, etc. This allows them to save time and money on going through that process themselves. As a bank who focuses heavily on the private equity space, we look forward to the rationalization of assets or for announced non-core divestitures to begin, as we expect these portfolio teams to be in position to acquire these assets. With certain private equity funds announcing significant fundraising results last year, our hope is these teams, some of which are former clients, to be successful winners.

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

MC: The days of sustained acceptable first lien leverage of over 2.0x are still in the rearview mirror. The market shift of maintaining strong balance sheets and moving away from growth for the sake of growth at all costs is still very relevant. With the ongoing consolidation wave and capital markets being accessible for much of the last 12 to 18 months, we have seen many clients term-out their RBL borrowings with a high-yield for instance, using those proceeds to pay down debt and position themselves and their liquidity for opportunistic transactions. Bank structures still include components to manage overall debt via leverage covenants on both a senior secured and total basis. So yes, while the appetite for debt may increase due to M&A, there are still guardrails in place and discipline from E&Ps on maintaining a healthy balance sheet.  Investors also require and/or expect companies to mindfully use debt as part of their process.  I would note; however, that while the capital markets have been open for some time, the recent tariff announcements and uncertainty in the markets appears to be disrupting access to high yield capital markets, increasing credit spreads for sub-investment grade companies.

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? Might unitranche financing and secondary markets grow in this environment?

MC: The RBL market is definitely open for E&Ps. Banks are looking to put capital to work and recycle the commitments that have been paid off via consolidation, or other forms of capital displacing a traditional RBL, such as an ABS. However, banks will still want to optimize that capital deployment with strong management teams, reserves’ support for the RBL, a healthy balance sheet, strong sponsors (in the case of private equity)—essentially the same things we have looked for in the past.  For those who may not yet be prime time for a traditional RBL, there are options. We have seen the emergence of alternative credit funds or firms who specialize in going where an RBL may not, whether due to concentration risk (too few wells), higher leverage levels or even a basin that is still being de-risked. We are also seeing an increased presence of private family office money interested in the oil and gas space, so this is another option for capital. As banks, it is important to know these folks as well given a future transition to the RBL market. There are firms who provide unitranche financing that can provide more capital and flexibility than a traditional RBL bank, but the cost of that debt is much higher, so a company needs to factor that in.

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?

MC: We still view the upstream space vitally important to the overall world economy and to U.S. national security in particular. Continuing to invest in resources that provide affordable, reliable energy to our citizens and those of the world leads to human prosperity. With capital discipline and focus on optimizing efficiencies, domestic E&Ps have heard the siren call to do more with less, and as such, they can maintain or grow production with less investment than say 10 years ago. E&Ps are also using enhanced technology and completion techniques to target highly productive areas, getting more “bang for the buck” out of wells. While the spend could be arguably less than in the past, companies are getting more production out of every dollar they spend.

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?

MC: The draw to natural gas relative to its environmental friendliness, LNG demand and expected growth of data centers, which require tremendous amounts of reliable power, is no secret to anyone in the energy industry. And most recently, with crude prices taking a tumble, investors could have a narrower focus on those E&Ps who are oil weighted. However, commodity agnostic-capital discipline is still paramount. Investors are still interested in where they can get the best return. We have seen cycles in the past that lean toward one commodity or the other, but we also know the financial performance and value of a company is about more than the hydrocarbon being produced. A solid management team with good rock and the expertise to not only produce it efficiently but also protect their balance sheet through cycles still matters. Banks may run stress tests on specific commodity groups in their portfolio to ascertain those names with the most risk, but the underlying importance of cost structures, liquidity, hedging levels, debt maturities and overall financial health can overcome a lower price environment.

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

MC: Our view on evaluating upstream and midstream opportunities has not changed.  We still run each opportunity through our standard process and models; however, with the shrink in the universe of prospects due to the aforementioned factors, we do see a path toward needing to lean in and be open to thinking outside the box. We do not anticipate deviating wildly from our approved and tested playbook, but this environment might require more innovative strategic thinking. Banks could also consider looking outside of the typical upstream and midstream deals they have historically cultivated and pursue other financing opportunities such as compression.