2025 Energy Year-end | Upstream A&D

Full Video Transcript

Evan: Hi, I'm Evan Smith, and welcome to our year-end recap for Stephens Energy Investment Banking Group. I'm here with Keith and Brad, and I'll have them give some brief intros before we dive into some questions on our A&D market this year.

Keith: Thanks, Evan. I'm Keith Behrens, and I run the Energy Investment Banking Group at Stephens. I've been at Stephens for 17 years and look forward to the discussion today.

Brad: Thanks, Evan and Keith. I'm Brad Nelson, head of the A&D group here at Stephens. I have also been at Stephens for about 17 years.

Evan: Great. Thanks, you all. We'll jump right in. Broadly speaking, A&D has been very active this year, one of the most active parts of our business over the last several years. Talk through some of our key deals and any trends that come to mind in relation to our upstream A&D deal flow.

Upstream A&D Market Trends

Brad: Sure. I'll back up a little bit and talk from a macro perspective. I would say that broadly speaking, A&D, M&A and corporate M&A have been healthy in 2025. There's been a good mix of transactions across all basins. In the previous two, three, four years, you probably saw a heavier mix towards the Permian for the obvious reason. Now that the new administration is in and has been for the last eight or nine months, we've obviously seen what has happened to oil. It's probably having a little bit of an impact on the Permian. That aside, we're seeing a very healthy amount of transactions across all major basins—five, six, seven of them. It's not centered around one particular basin, and there's been a nice mix of both corporate and A&D deals throughout the year. We'll get into this here in a little bit: you're seeing a little more weighting towards gas than oil, and we'll expound on that here later.

Keith: Brad is going to talk about it a bit. A lot of takeaways from our Blackbeard Arkoma sale. That was a gassy deal in the Arkoma. When we were getting ready to launch that process, internally we had a lot of discussions about how much interest we thought we'd get in terms of NDAs executed and bids. It was probably about 3x the interest we expected out of the gate. One of the takeaways, as Brad mentioned, is a lot of interest in gas. We also had a lot of family office interest in that deal, either a family office that just wanted to buy the assets outright or backing a team that bid on that asset package. Their view was that we have a bullish view on natural gas prices. We've already seen that a little bit with rising natural gas prices. It shows that these family offices know what they're talking about. A lot of interesting takeaways: it's a secondary basin, with a lot of interest, and it was a gassy deal.

Brad: Keith, you hit on what I was about to hit on. That particular deal at that time was really the first big print in the Arkoma for an extended period of time. We've obviously seen a lot of gassy transactions over in the Haynesville and the Marcellus and a couple of other areas here in the US, but in terms of a Tier 2, it's a great basin, no question. From a market perception, it's not quite the Haynesville and not quite the Marcellus. As Keith pointed out, we had a lot of interest from a lot of different types of buyers. I would say that's one trend we saw not only in 2025, but probably in the middle of 2024: people absolutely looking to add inventory, and a lot of that inventory is going to be in Tier 1A, Tier 2 acreage positions. We saw people paying for that inventory here in the calendar year. This was a gassy deal. As we sit here and record today, gas is around $4.80 per M, plus or minus. The run-up in gas has probably taken place in the last three months. I'd say for the first six, seven, eight months of the year, gas was probably $2.50 to $3 per M. What we could tell—and we actually saw this on a deal a year ago, late summer last year—was people leaning into the potential for longer-term higher gas prices. Everyone has obviously heard about LNG for quite some time now, deservedly so, but now you're hearing a lot more about AI, the grid, data centers, and potential demand looming, which is having a big impact on gas. The point is, even as early as the middle of summer 2024 into now, we are seeing people absolutely paying for the PDP, paying for the production, but absolutely leaning into the upside and allocating value to that.

Keith: One other deal we were involved in was Juniper's merger into PEDEVCO, which is a small public company. Juniper had a bunch of Rocky Mountain assets—Powder River Basin and DJ Basin assets—and a little bit contrary to Brad's point, in an outright sale, there was a lot of upside they didn't feel they would get value for if they just did a cash sale. They wanted to maintain the exposure to upside with those assets. They really wanted to merge it into a public company and then have upside in the future stock price appreciation. They merged into PEDEVCO. There are a lot of older, mostly private equity-backed portfolio companies up in those two areas that we think will be good merger partners going forward to create a public company of scale. We thought that was an exciting deal, and we were glad to be a part of it.

Interest in PDP Oil and Gas Deals

Evan: Great. Keying in on one of those trends, the uptick in interest in PDP deals, not only from what we've seen but what we're seeing more broadly in the market: what do you think is driving that appetite for interest in PDP and maybe bidding down those transactions to tighter discount rates?

Brad: What I would say to that is I think, stepping back for a second, seven, eight, nine years ago, the entire industry, led by the bigger publics, went to more of a yield model. Historically, before 2016 and before, it was very difficult to find an oil and gas company other than an MLP that actually provided yield. Fast forward to where we are today, nearly all of the publicly traded companies are providing some sort of a yield. It does vary. We're seeing some of the bigger companies produce anywhere from 3% to 4% on the low end, up to a couple of them in the low-to-mid teens. I think that has had a ripple effect across the rest of the industry. I think you have a lot of investors who may have been parking capital into other industries also seeking yield. It's probably just a value play from their perspective. They have capital to deploy, are looking at other industries, and are saying the oil and gas industry is a great place to play that provides anywhere between a seven and 14% yield, depending on the situation and the asset base. From where we sit, I think it is more demand-driven by institutions looking for yield.

Keith: And there is just really good financing behind those players that are trying to buy PDP. Financing from insurance companies, both on the equity side and the ABS (debt) side of the balance sheet. You've seen companies like Flywheel, which are active PDP buyers, being able to buy assets because they have good financing behind them. Family offices like to buy PDP, and we've seen them participate in processes and buy assets. So I think it's, to Brad's point, demand-driven, but there is just a lot of good financing behind these companies looking to buy PDP.

Brad: One other thing to add to that is if you step back to 2014, 2015, 2016 through today, in our opinion, the health of the industry itself has never been better. Where the banks used to provide 3x to 6x leverage, I think most of these companies are now under one or two terms of debt. Investors know they are coming into a healthier industry. It's under-levered and able to provide that yield.

Non-Operated Oil and Gas Assets

Evan: Great. Switching gears a little bit, another trend to key in on is the uptick in both deal flow and valuations for non-operated deals. There's certainly been a shift there over the last several years, not only what we've seen but what's happened in the broader market. Talk about what we've seen of late and any insight you might have there.

Brad: The non-op market has evolved quite a bit also in the last decade. A decade ago, you may have had one publicly traded non-op company. Now you have three: NOG, Granite Ridge, and Vatess, for the most part. You also now have a very healthy layer of institutional capital and family office capital that are looking to deploy capital into the non-op space. It's demand-driven. They know they are partnering with operators that are healthy and are going to drill these positions. They're a little bit more predictable. All that has played into the non-op growth.

Keith: It's a hot part of the space for sure. We're seeing NOG, in particular, co-bid deals with operators. Operators can now look at taking on larger deals because they have this non-op capital or players that will participate in bid processes with them. Family offices love the non-op space. Part of it, I think, is just the diversity of the asset base. They like that they don't have an investment opportunity that is just a few wells. When you have a non-op package (cite: 3), it's going to be a very long list of wells and diversity. We are seeing a lot of non-op capital coming into the space. One example of that would be Ellipsus. They're backed by a family office and have been very active.

Brad: The other thing on the non-op side: the companies or the funds themselves are providing very appealing outcomes or business plans to the investors. If you look at any particular non-op fund, they may be partnering with 10 to 30 different operators. An investor has exposure to various, really sizable operators across multiple basins. You actually have a very nice, unconcentrated position across various platforms. At the same time, they are also providing very good returns. It's a very good risk-reward outcome or potential for new investors. Also, the divisibility of the asset class itself—the working interest—enables structure capabilities. You can do a co-bid, a non-op sell-down, or a development program financing. We're seeing all that in our day-to-day activity. The other thing to add is, if you're getting into something like this, because it is divisible, you can also get out. There is now more of a liquid market. If someone needs to hold it for two years or 10, they have the ability to drive their own exit.

Emerging Upstream A&D Trends

Evan: Right. Makes sense. Without naming names, our current A&D pipeline has a mix of assets and deal types that we didn't see as much of last year. Talk through what some of the new emerging A&D trends are that we're seeing, not only this year but going into next year.

Brad: Throughout the year, we have seen a drop in oil prices. I think at the beginning of the year, we were in the mid-$70s, and now, as we're recording, we're in the high $50s. There are a lot of different views on the street right now, but I think most people's views are that we may be in this mid-$50 to low-$60, possibly even lower range going into calendar 2026 and 2027. That's definitely driving an impact on the deal type between oil-weighted assets and gas-weighted assets. If you looked at the stats for calendar 2025, they are actually pretty equal-weighted between oil and gas deals, both corporate and A&D. But if you look at Q4, where you are now starting to see the pricing for oil come into play, I want to say that 70% of the deals in the fourth quarter of 2025 are now gassy. I think that trend is probably going to continue for the next year and a half. It wouldn't surprise us if at least two-thirds of deals are gas-weighted.

Keith: I definitely agree with all that. There's a little bit of natural selection in our pipeline because we're starting to see more gas deals just because gas prices have come up. I think the early part of next year, as Brad said, will be more gassy deals. To Brad's point, there are some people projecting oil prices will start rising late 2026. Who knows what's going to happen, but if that happens, I think we'll probably see some family offices wanting to buy oil assets before that uptick in oil prices, like we saw on the gas price side. We saw that in the Aroma process—family offices wanting to lean in before you had the uptick in gas prices that we're seeing right now. Maybe we'll see some of that on the oil side, but I think the first half of the year we're going to be busy on the gas side in terms of sell sides.

Brad: Keith brings up a good point: there is plenty of demand for oil deals right now. If you have the capital and want to put money into an oily deal, people are searching for that inventory and production for hopefully a better time, call it 2027-2028. I don't think it's from a lack of demand; I just think that in general, if you're an oil-weighted company, you see where pricing is right now, and you're probably going to hold off for a better time.

Evan: Makes sense. Good insight. Moving on to the financing front, it's been interesting to see what's happened this year. Bank or RBL deal volume is down quite a bit year-over-year, but the appetite there remains strong. We've even seen some new RBL bank entrants into the market over the last six to twelve months. Private credit remains slow. Those participants seem very eager to put capital to work. Talk about what you all are seeing and how that might impact the A&D market.

Private Credit, RBL, and Energy Financing

Keith: I think generally it has been slow on the private credit side. But there are a lot of groups out there looking to put capital to work, so that type of debt financing is definitely available. I think it's simply whatever you could get from a bank times two, roughly, at a higher cost, is what the unit market looks like. That capital is available. Those groups have generally been slower. I think, back to Brad's point, a lot of companies just want more conservative balance sheets. We're seeing a lot of balance sheets at one times debt, give or take, and you really don't need to do anything other than RBL if that's the type of leverage you want to have. The RBL market has gotten a little better. There have been some new entrants coming into the space and some groups that left coming back. Overall, that's where the debt market is. On the ABS side, some ABS deals have gotten done—that is another type of debt financing you can definitely put in place. Really, on the private equity side, there's definitely been a slowdown in private equity fund investment activity; fewer teams are being backed. There have been some funds raised—EnCap’s Upstream Fund 12 is one example. That type of capital is available, but there's still generally been a slowdown on the PE fund investment side. Where we're filling the gap is really with family offices. That's picked up. It's hard to track stats. We've been involved in close to a billion dollars of private equity coming into the space from family offices in our shop, and we think that's a trend that's going to continue going into 2026.

Brad: One thing to add to that: in the last four or five years, you've had a lot of corporate M&A, corporate mergers. Obviously, both companies going into the transaction most likely had bank debt. When you combine them, they are actually paying off quite a bit of that bank debt. You've had a lot of bank debt or private credit that's been repaid. Combine that with an industry that historically was adding two and a half to 4x of leverage to their situations, to where, as Keith said, everyone is now thinking about lower leverage. If you pull up a lot of these 10Ks or corporate presentations, a lot of them talk about paying off bank debt, keeping leverage low, and that is at the forefront of everyone's mind. The combination of those two things has made it a little bit difficult for some of these banks to get back in sizable positions. My last comment is that through all this corporate M&A and A&D, there are fewer companies, too. There are just fewer people to lend to. That's something that these institutions are fighting as well.

Evan: That makes sense. Keith, I want to dive a little bit more on that comment you just made about family office participation. We've seen a meaningful uptick in their participation in our A&D deals, not just as investors but sometimes even participating in buying these asset-level deals. Talk through what you think might be driving that evolution.

Driving Family Office Energy Investment

Keith: The family offices, in a lot of cases, are contrarian players. I think they saw a lot of capital leaving the space for various reasons—ESG reasons and what have you—but not fundamental reasons; just leaving the space because they no longer liked hydrocarbons. When these family offices saw that happening, it piqued their interest. They're contrarian players; a lot of times they invest in areas where they see people leaving for non-fundamental reasons. Also, if you look at valuation charts on public equities or A&D deals, they are still generally at historic lows. Public companies trade in a lot of cases at three or four times EBITDA. A&D deals are getting done in a lot of situations at three times cash flow or four times cash flow. If you are a family office and you have a long-term hold, you don't think a sector is going away. They clearly don't think that the oil and gas sector is going away. You can invest at three to four times cash flow and hold assets for 10-plus years. Within that investment horizon, there's a view that "I don't have to get the gas or oil price right when I'm making an investment." If I can hold something for 10 years, at some point in that investment cycle, commodity prices are going to be where I like them to be, and then I can exit if I want to or continue to hold things. Back to Brad's point, yields are being paid along the way in a lot of these situations, which de-risks the situation a little bit. A lot of these deals are PDP-heavy deals, which also de-risks the situation. All that creates interest in the oil and gas space. We are seeing a lot of family offices come in in a big way, and we think that will continue.

Brad: One thing to add to that: family offices and really any institutional investor do not like blind pools. If you have an A&D deal where you have a particular asset and it's easy to underwrite—you can look at it, you can figure out if it fits your view at this point in time, whether you like the basin or the hydrocarbon construct, whatever—you have an identifiable asset that a family office can sink their teeth into and figure out if it's something they want to own or not own. In our opinion, it's the polar opposite of a blind pool.

Evan: Great. Wrapping up this section on A&D, looking ahead, talk through what you think the landscape looks like next year, particularly in light of where commodity prices sit and where forecasts for prices for next year for both oil and gas sit. Let me know how you think next year might be from an A&D perspective.

Upstream M&A Outlook for 2026

Brad: Sure. As we alluded to this earlier, as we're recording, gas is around $5 and oil is at $58. Stating the obvious, we think that next year there are going to be more gas-weighted transactions. I still think there's probably going to be a lot more A&D deals than there will be corporate deals simply because there are just more assets to trade at the A&D level. One thing we should have mentioned earlier: we are a middle market bank, and our group is also middle market. Our deal sizes are in that $100 million to a billion, plus or minus. We see there being a lot of transaction volume in calendar 2026 within that swath, again, a little bit more leaning towards gas. It wouldn't surprise me if we get into the back half, middle of 2026, that you'll start seeing oil transactions pick back up as people are looking into 2027.

Keith: I definitely agree with all that. I think the first half of the year will probably be heavier on the gas side. We have a number of oil opportunities in our pipeline, but they are more waiting and watching the market a little bit. We'll see where oil prices are in the second half of the year. I could see if they pick up a little bit, oil deals start picking up later in 2026. Overall, I think it should be a pretty active year on the A&D side.

Brad: We could see a similar phenomenon on oil as to what we've been seeing on gas. We have seen in the last year and a half people allocating a fair amount of value to upside on gas deals before gas really rose. That could be something similar that happens in 2026 as it relates to oil. Meaning, we see oil prices in the $50 to $55 level, but our view is $65 to $70, maybe even $75, over a four, five, six-year period, and people may lean into that. If there's enough demand there, I can see where oil transactions could pick up.

Evan: Fingers crossed. Appreciate it. That wraps up our A&D segment. Thanks for the discussion.

Keith/Brad: Great. Thank you. Thanks, Evan.