Fueling Success: The Shifts in Energy Lending and How to Adapt

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February 1, 2024 – Oil & gas companies continue to grapple with mounting funding challenges due to shifting investor preferences towards sustainable alternatives, regulatory pressures, and evolving market dynamics that have constrained access to traditional capital sources. The escalating emphasis on sustainability and the global drive towards renewable energy alternatives has significantly impacted investor sentiment, diverting capital away from traditional fossil fuel enterprises. Moreover, regulatory pressures and evolving market dynamics have intensified the hesitancy among financial institutions to invest in oil and gas ventures, compelling a reassessment of risk-return profiles. As a result, the sector contends with a diminishing pool of investors willing to support its endeavors, highlighting the imperative for innovative strategies to navigate these challenging capital acquisition landscapes.

Securing funding or accessing credit lines to foster production growth and accretive acquisitions will remain a challenge in the coming year. With 2024 being an election year, plus increased interest rates, a great deal of uncertainty may drive businesses to remain conservative, however the need for capital will not slow as the United States continues to increase production. The Energy Information Institute (EIA) estimated a significant rise in U.S. crude oil production, projecting an average of 12.4 million barrels per day (b/d) in 2023 and 12.8 million b/d in 2024, surpassing the previous record set in 2019.1 Also considering the state of current interest rates, taking on more debt presents added risk.  In the Energy industry, particularly within the oil & gas sector, those in search of nonbank, private sources of capital have been facing an added challenge: demonstrating a committed operational investment in alignment with Environmental, Social, and Governance regulations (ESG) and best practices. This serves to appeal to private equity investors or, at the very least, alleviate some of the due diligence constraints.

In March of 2022, the Securities and Exchange Commission (SEC) proposed new rule changes requiring public companies to disclose specific climate-related information in their financial filings. These proposed changes include reporting climate-related risks likely to affect business operations and financial conditions, disclosing greenhouse gas emissions, detailing the impact of climate events on financial statements, and outlining the management of climate-related risks.2

Companies and management teams that are adept at adopting, developing, and implementing ESG solutions appear to have a competitive advantage to access capital needed for growth.

So, what best practices can your company follow when seeking an attractive investment position?

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