A fundamental shift in capital sources available for upstream energy companies to fund various business operations began several years ago. What began initially as a short-term response to sector volatility is quickly migrating towards a long-term secular trend. Historically dominant funding sources, consisting primarily of commercial banks and public and private equity, have continued to withdraw from the sector. The acceleration of this trend has served as a catalyst for recalibration of asset values, investment return expectations, and opened the door for alternative sources of capital - importantly, institutional forms of capital - to fill a growing capital funding gap.
Energy Mezzanine for Institutional Investors discusses this fundamental shift in funding of the energy sector and the importance of junior financing to fill the funding gap of this essential industry. We look at the recent trends in the energy sector, the continued institutional interest in conventional energy, and then assess the implications for the maturing energy market more broadly.
Investors in the energy sector are increasingly seeking investment opportunities providing yield, dividends, distributions, and return of capital. For investors seeking the investment protection of a debt claim but with contractual yield in the low-teens and equity-linked performance upside, evolving market conditions are increasingly supportive of mezzanine debt and other “structured” capital as a very relevant source of funding for middle-market upstream companies increasingly focused on sustainable production, cash flow stability, and conservative use of leverage.