by Alex Trlica, Chris Butta, BOK Financial Energy
Alex Trlica
When the Ground Shifts Beneath your Feet
At 2 a.m., the lights were still on at the office. For six months, the deal team had worked relentlessly to structure a creative proposal for the winning bid on the seller’s oil and gas assets. The Purchase and Sale Agreement (PSA) was signed, hedge strategy discussions were ongoing, and lender term sheets were close to final. What could go wrong?
Well, the team was 60 days from closing when the White House’s April 2nd announcement of larger- and broader-than expected tariffs abruptly caused NYMEX crude oil futures to drop 20 percent in 48 hours. This sudden change now jeopardized the valuation work that underpins the rationale behind the entire transaction.
Navigating the Pivot
As the above events demonstrate, volatility isn’t just a risk in oil and gas; it’s a given. So, what happens when you spend weeks negotiating with lenders only to have the market turn before ink meets paper? This kind of unpredictability forces lenders, producers and investors alike to reassess constantly. It may compel banks to hit pause, recalibrate their proposed borrowing base or abandon traditional debt structures entirely. In some cases, borrowers may be forced to scramble for private capital or non-bank solutions simply because traditional commercial banks have lost confidence for a moment.
The key to surviving—and thriving—in this kind of environment is agility. The most successful producers are those who surround themselves with partners who can pivot fast. That means having lenders who understand the energy market, the producing asset and its potential across multiple pricing scenarios. That means spending meaningful time with engineering technical staff on the front end, working through due diligence to understand both the borrower’s and the lender’s perspectives on the asset. It means being in constant communication with the deal team who can retool a proposal to meet the needs of the new reality.
Confidence doesn’t come from pretending things are stable. It comes from being prepared for when they’re not.
Hedging, Development Plans, Syndications, and Engineering Collaboration
Right now, hedging isn’t just a box to check; it’s crucial to ensuring that the chosen capital strategy is preserved through the life of the transaction. With volatile pricing, hedges are more than risk mitigation; they’re a way to support valuation, underwrite debt, guarantee return, and instill lender confidence. Utilizing PSA hedging has become commonplace for transactions with substantial Proved Developed Producing (PDP) value that underpins the acquisition. Likewise, it’s not uncommon for companies to deploy a put strategy securing downside protection while allowing for “value add” with a rebound in product prices, which can subsequently be restructured at a later date. The same goes for development plans. Lenders want to know that producers have a flexible, executable path forward—one that can absorb shock.
Chris Butta
Syndications, too, are changing. In times of market uncertainty, it is more important than ever to partner with lenders who understand and are committed to the energy space. Banks who partner often can work closely, sharing risk in smarter ways and forming syndicates that understand the upstream market intimately. This collaboration enables facilities to be both nimble and resilient, which are traits that are critical in an unpredictable market.
Roll back several months and one of the critical first steps in this lending process was a customer engineering review of the subject producing asset. Their internal staff performed a detailed technical analysis of the producing and non-producing potential of the targeted asset. This value assessment was an essential aspect in developing a winning proposal. Once the customer’s deal was headed towards closing, the lead lending bank takes the customer’s technical review and requires its internal engineering team to perform its own analysis of the oil and gas potential in comparison to the buyer’s valuation. After all, from the lender’s perspective, these producing assets are the collateral upon which the pending loan agreement is based. As stated earlier, volatility in oil and gas is a given, particularly with regard to prices as shown in the early April drop. However, a thorough technical analysis of the properties by both the borrower and the bank can reduce one aspect of this industry’s volatility.
Given the dynamics discussed above, as lenders we advise our customers to identify the pressure points of the transaction, then as the lead bank work on strategies with partner banks to prevent issues from derailing a successful closing. If it’s a long-life property set with lower margins, consider a robust swap strategy when signing a PSA. If you are paying for upside due to strong drilling economics on undeveloped acreage, keep Borrowing Base utilization modest so you can afford flexibility in your development plans. By understanding and discussing these pressure points, you significantly improve your odds of closing, even if unexpected volatility arises.
Looking Ahead
So, what’s on the horizon? Tariff uncertainty, global production shifts, and the increasing politicization of energy policy are all factors that could impact the oil and gas industry. The lending ecosystem will likely adjust, and strong, trusting relationships between borrowers and lenders will be critical to navigating through the uncertainty.