Energy & Infrastructure Insight: Upstream Energy

North American upstream energy has regained investor appeal as stronger balance sheets and reduced bank lending create opportunities for private reserve-based finance.

• The United States shifted from a net energy importer to a net exporter in 2019 after hydraulic fracturing and horizontal drilling expanded economically recoverable reserves.
• Enhanced recovery techniques have developed more than 1.7 million U.S. wells, producing over 7 billion barrels of oil and more than 600 trillion cubic feet of natural gas; in 2022, fracking represented about 66% of U.S. crude output and 80% of dry natural gas output.
• Cheap debt after the 2008-09 financial crisis, high oil prices and optimistic management assumptions drove aggressive acreage purchases and borrowing, while lenders valued projected future growth alongside existing cash flows.
• Voya's borrowing-base example shows the sensitivity of lending capacity to commodity prices: a $55 oil and $2.20 gas scenario produces an $87.9 million borrowing base, compared with $127.8 million at $80 oil and $2.50 gas, using a 65% advance rate.
• The sector's weaknesses surfaced during the 2015-16 shale bust and again after the Covid-19 pandemic, when falling prices exposed leverage, optimistic reserve estimates and dependence on capital-market access.

Takeaway: Private lenders with expertise in complex reserve-based securitizations may find attractive opportunities as bank capital retreats, provided they underwrite reserves, production economics and commodity-price sensitivity conservatively.