Hart Energy queried banks across the U.S. oil and gas investment space to analyze the lending environment amid uncertain times. This exclusive interview with Marc Graham, managing director and head of energy at Texas Capital Bank, is the third in a series with Oil and Gas Investor.
Deon Daugherty, editor-in-chief, Oil and Gas Investor: What are your goals for working with the oil and gas industry during the next 12 to 18 months? What factors will influence your engagement?
Marc Graham, managing director and head of energy, Texas Capital Bank: What Texas Capital is doing to support the energy sector is beyond just a bank with ambitions to take market share. We’re all attracted to this mission to create a full-service financial institution, but one that’s based in Texas. We’re trying to create the bank that the Texas economy and Texas clients deserve.
“Banks have had capital returned to them and their overall loan portfolios have shrunk. The number of names they’re lending to have shrunk through the disappearance of all those companies. That makes banks more anxious, or seeking opportunities, to redeploy that capital.” —Marc Graham, managing director and head of energy at Texas Capital Bank
The energy reflection of that, which I lead, is we are trying to create a platform through the addition of investment bankers through the addition of equity sales, trading and research capabilities. We initiated coverage on 40 publicly listed energy names that were upstream, sort of low beta services, compression names, water handling names and mineral royalty names.
We want to differentiate ourselves based on three things: idea generation; attentiveness, meaning we’re going to be the team that’s available on a Friday evening or on a Sunday morning. And then it’s strategic alignment for the energy space that we get from the fact that we are a Texas state-registered bank, not a national association. We are here to unapologetically support all of the industries that are important to the Texas economy, which means we can be the unapologetic supporter of oil and gas. And when I tell a CFO that, he just recognizes that they don’t have to worry about our commitment to the sector. So long as crude is being produced in Texas, we’re going to be here to support it.
DD: To what extent might macro uncertainty (policy changes, geopolitical upheaval, tariffs, OPEC, war) impact lending and spending in the upstream space? How does uncertainty factor into your decisions about which sector to engage?
MG: I think that with the macroeconomic uncertainty, we have to be very cognizant of where the bank’s capital comes from. We are intermediating, mediating, depositors.
We have to be very cautious of how we deploy that. But that is also why we’ve built this team that can help companies access all sorts of alternative sources of that capital. If you’ve asked if the macro environment is such that we shouldn’t deploy bank capital into the sector, whether it’s geopolitical, upheavals, tariffs, war, you and I can have another hour-long conversation about what the impact of each one of those might be on the price of commodities.
If we go to war in the Middle East, you’re going to see crude go to $200/bbl, right? If we sanction Russia, we’re going to see crude go to $200/bbl. We can’t apologize for the fact that if the macroeconomic environment becomes such that it’s not appropriate to deploy the regulated side of the bank. We have a team that has the capabilities and know-how to access other sources of capital. And we all know other sources of capital have a different risk-return profiles. We are built to be able to help companies regardless of the macro environment.
DD: How has consolidation impacted competition 1) for E&Ps seeking capital and 2) for their lending partners at investment/commercial banks?
MG: We’ve seen record amounts of consolidation. Banks have had capital returned to them and their overall loan portfolios have shrunk. The number of names they’re lending to have shrunk through the disappearance of all those companies. That makes banks more anxious, or seeking opportunities, to redeploy that capital.
So, from a bank perspective, our portfolio hasn’t been immune to it. I don’t think any portfolio can be immune to the disappearance of the likes of Endeavor. Marathon hasn’t gone yet, but Pioneer [Natural Resources, acquired by Exxon Mobil], Apache acquired Callon.… The list goes on and on and on. And when that happens, then banks see a return of capital and that represents shrinkage for a bank.
We’re all interested in redeploying that [capital]. The virtuous cycle, as you’re aware, of consolidation is whenever a company makes an acquisition—and with all of the big ones, they also announced divestiture programs [of non-core assets]—and that gives banks the opportunity to lend again.
This virtuous cycle of consolidation and then divestiture of [what may be] then deemed non-core assets creates the opportunity for new company formation or smaller company growth, which then gives banks the opportunity to redeploy that capital. So, consolidation is a feature, not a bug, of our industry. It is never going to go away. It is one of the wonderful things about it because it allows assets that don’t compete for capital in one company’s portfolio to become the showcase of another company’s portfolio, and then we get the opportunity to lend into that company’s growth.
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?
MG: This is where what you need to see is a market where a buyer and a seller come together. And for a buyer and a seller to come together, there has to be stability amid commodity prices. And so, unfortunately, we saw a tremendous amount—this is the unfortunate part—we did see a tremendous amount of consolidation in 2024, and then we saw a period of volatility in commodity prices. That put a pause on consolidation.
Now, we thought we were going to see stability. I thought for sure that for the second half of 2025, we were going to start seeing that consolidation pace pick up again.
And guess what? Now we’re at $62 crude.
So once again, sellers are going to say, “No, it’s going to be a V-shaped recovery and it’s going to be quick.” And buyers are going to be saying, “I don’t know. That’s not what the curve would imply.”
We were working on a large number of deals with large numbers, but as we were working on these deals, commodity prices started moving. Sellers don’t want to sell. They want to see where things land and deals [may] come off the market. And I thought those would’ve returned. But now in the current commodity price environment, I’m certain they will not.
Again, consolidation is a feature, not a bug. It is the natural order of things in our space. It’s driven by, in my opinion, two things. One is efficiency of scale. These are commodity companies. The bigger you are, the more economic it is going to be to produce. So, you’re chasing efficiency of scale and you’re also chasing inventory. And those are, in my mind, the two things that drive this consolidation. We’re always going to see it, and it’s a virtuous cycle. It’s what gives us the opportunities to back new companies, but we need stability and commodity prices to see those transactions take place.
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?
MG: We’re doing the same thing in oil and gas that we did with real estate post-2007, 2008 when you saw housing [prices] start to fall. And then we underinvested, and you get to 2020 and suddenly you see a big rise in high inflation and home prices because now we can’t catch up. There’s just so many homes we need to build to catch up.
When we used to be doing 2 million housing starts per year, then we dropped to 400,000 for a number of years, we just [couldn’t] make up that gap. And that’s how’s those prices go up.
You often heard we’re creating the same problem in oil and gas. We are underinvesting, we’re not drilling enough. The tailwinds here, of course, are the efficiency gains that we’re seeing from the drillers. It is amazing the advances that they are making in time to drill wells, time to drill longer lengths. And so, with fewer rigs, we continue to add barrels. The evidence is production, daily production, which continues to increase even though the rig count keeps falling. The refrain was that we were underinvesting and that we would see it in the production, but the production just hasn’t come down.
