Our Take
Scarred oil companies are choosing balance sheets over growth even at $100 oil, making this cycle fundamentally different from past booms.
Why it matters
Energy lending patterns signal a structural shift in how commodity companies manage volatility. Regional banks specializing in energy may benefit as majors retreat from the sector.
Do this week
Energy lenders: Review client hedging requirements before Q3 earnings season so you can identify which borrowers lack downside protection.
Oil companies resist borrowing at $100 crude
Oil prices spiked to roughly $100 per barrel during the Iran war, but energy lenders report their clients aren't ramping up production or seeking new loans. Active oil and gas rigs totaled 547 as of May 1 (per Baker Hughes), up just three from the prior week and 37 below year-ago levels.
Banks cite producer discipline stemming from the 2014-2016 oil crash, when WTI crude fell from $100 to below $35 per barrel (February 2016), triggering widespread bankruptcies and loan defaults. "We're seeing extreme discipline from the producers, because they've been through a lot over the past decade," said Marc Graham, head of energy at Texas Capital Bancshares.
Market backwardation reinforces caution. While spot prices hit $100, futures contracts two years out trade closer to $65-$70 (per CME Group), suggesting traders expect prices to fall. "You have to have some certainty, some stability, some visibility into what those prices might be," said Mike Bock of Petrie Partners investment banking.
Investor mandates prioritize returns over growth
The shift reflects investor demands for capital discipline over growth-focused strategies. Oil companies now emphasize dividends and share buybacks rather than production expansion, constraining their appetite for debt-funded drilling projects.
Climate-focused divestment and regulatory scrutiny under the Biden administration pushed major banks away from energy lending, though some are re-engaging following Trump's reelection and the shutdown of the Net-Zero Banking Alliance. Regional banks may capture market share as a result.
Enhanced underwriting standards include more restrictive loan provisions and increased hedging requirements, which dampen upside from price spikes but provide stability during downturns. "The industry has gotten a lot more predictable even through the down cycles," said Jack Herndon of Cullen/Frost Bankers.
Energy expertise becomes competitive advantage
Banks with deep energy knowledge and engineering capabilities can profit from the complexity that deters new entrants. "If you're in it, and you're very good at it, you've got a long track record in it, you've got engineers that are going to double-check what the borrowers are telling you proven reserves are, it can be one of the more profitable lines of business," said StoneX analyst Brett Rabatin.
Lenders are diversifying beyond energy while maintaining sector expertise. Regional banks with historical energy focus, like BOK Financial (founded 1910 in Oklahoma) and Texas Capital, position themselves as reliable partners when larger banks retreat during downturns.