Road To WECA 2024: Who Is & Who Isn’t Financing The Future Of Oil & Gas?

The energy sector is undergoing a profound transformation driven by the urgent need to decarbonise and transition to more sustainable energy sources. This shift is redefining traditional financing dynamics within the oil and gas industry, as conventional sources of capital become increasingly reticent and new players emerge. Understanding who is and who isn’t financing the future of oil and gas is crucial for those navigating this evolving landscape.

Traditional Capital in Retreat

Historically, European banks and U.S. financial institutions have been significant financiers of O&G projects. However, a noticeable withdrawal by these traditional lenders is reshaping the capital landscape. This retreat is largely influenced by heightened environmental, social, and governance (ESG) concerns and the growing regulatory pressures to reduce carbon footprints. European banks have been at the forefront of this shift, reducing their exposure to fossil fuel investments in response to stricter climate policies and shareholder activism. Similarly, U.S. banks are exhibiting increased caution, reassessing their portfolios to mitigate climate-related financial risks.

The impact of this withdrawal is profound. Exploration and Production companies, especially smaller and medium-sized ones that lack substantial balance sheets, find themselves in a precarious position. With traditional sources of capital drying up, these companies are compelled to seek alternative financing avenues to sustain their operations and drive growth. The difficulty for them is knowing who to turn to.

Alternative Financing to the Rescue?

In response to the vacuum left by traditional lenders, alternative financing mechanisms are gaining prominence. Private credit has emerged as a viable and attractive option for O&G financing. Unlike conventional banks, private credit funds are less constrained by regulatory requirements and are often more willing to take on higher risks in exchange for potentially higher returns. This flexibility makes private credit a crucial player in the financing of future O&G projects.

Private equity is also playing an increasingly significant role. These investors are looking beyond short-term profits, focusing instead on long-term value creation and operational sustainability. Private equity funds are often involved in restructuring deals, providing the necessary capital to companies looking to innovate and adapt to the new energy paradigm.

M&A: The New Normal

Mergers and acquisitions are becoming a strategic tool for achieving operational sustainability. The recent wave of E&P consolidation is driven by the need to scale operations, achieve cost efficiencies, and access new technologies. This is demonstrated by the recent wave of activity we have seen in the US. However, unlike where large caps are acquiring their smaller competitors, Ithaca’s acquisition of ENI’s UK O&G producing assets highlights that the jury is still out as to whether mid-caps are the hunted or the hunters. One thing is clear, the trend towards consolidation is central to stay competitive.

Business Models in Transition

To attract new forms of capital, O&G companies must adapt their strategies and business models. Presenting themselves as attractive investments involves a commitment to ESG principles and demonstrating a clear path towards decarbonization. Companies need to showcase their efforts in methane reduction, carbon capture, utilisation, and storage (CCUS), and electrification as part of their broader sustainability initiatives.

Moreover, fostering partnerships with alternative financiers requires transparency and alignment with their investment criteria. Private credit and equity investors are looking for stable returns and robust risk management practices. O&G companies must, therefore, build strong governance frameworks and adopt innovative technologies to enhance operational efficiency and environmental performance.

Business Models in Transition

At the World Energy Capital Assembly 2024, we will be exploring the financing landscape for the O&G sector in more detail, hearing from senior decision makers about the significant transformation taking place in the sector, and predictions for 2024 and beyond. Traditional lenders are stepping back due to ESG concerns and regulatory pressures, creating opportunities for alternative financiers like private credit and equity funds to step in. M&A activities are also reshaping the industry, driven by the need for operational sustainability and scale. As the industry adapts to these changes, the ability to attract new forms of capital will be pivotal in determining which companies can thrive in the future energy landscape. For O&G companies, embracing sustainability, innovation, and strategic consolidation will be key to securing the financing necessary to navigate this transition.