BANKING & FINANCE - The Shift to Hybrid Financing for Upstream Oil and Gas projects

Introduction

In August 2023, BW Energy raised $80 million upfront to develop the Golfinho field offshore Brazil. The deal was simple: a trader paid cash now, BW repaid in oil later. On paper it was a sales contract. In practice it worked like equity, as the trader took junior risk, upside via price, and governance leverage, all without issuing new shares. Equity hasn’t disappeared. It has shifted into contracts.

Traditional equity windows are patchy, and bank loans are short-lived. Traders and private-credit funds now step in. They will fund flows of oil, not stories, but only if contracts make those flows certain. In May 2024, GeoPark secured $300 million from Vitol (expandable to $500m) for ~20,000 barrels per day from Colombia’s Llanos-34 block over 20–36 months. It hardwired pricing, hedging, and receivable assignment into a waterfall (who gets paid first). Barrels, not multiples, set value.

Boards now test financing against three questions:

1. Cashflow certainty: will production revenues actually cover repayment?

2. Enforceable security: can investors follow the money from the field into a secured account?

3. Watertight control: who traps cash and who can step in if things go wrong?

These tests create equity-like capital inside contracts. Failing them now makes investors widen the margin or demand extra structure.

Why equity faded and who filled the gap

Equity markets for oil companies have thinned out. Volatile prices make it hard to sell stories based on future production. Higher interest rates raise hurdle returns, so investors demand more. Banks, pressured by ESG rules and capital limits, prefer short-term loans. Together, these shifts closed the equity window.

In that space, traders and private-credit funds moved in. Their test is as simple as proving the flows. If receivables are assigned, accounts are controlled, and hedges match production, they will take junior risk at margins once reserved for banks.

This is why the focus has moved from “how much oil is in the ground” to “how tightly cash is locked from buyer to bank account.”  Vinson & Elkins, for example, advised Vitol’s Valor Mining Credit Partners (2025) on hybrid financing structures that built enforceability first. Once receivables and accounts were locked, capital came in akin to bank-like pricing. This shows enforceability can narrow margins by tens of basis points.

Other firms prove the same point. Kirkland & Ellis, advising Diversified Energy’s ABS VIII (2024) and ABS X (2025), wrote coverage tests and hedge terms in plain numbers that Fitch Ratings could model directly. Because investors could model cashflows, margins tightened.

Skadden, on Venture Global LNG’s $3bn perpetual preferred (2024), fixed two points that set price. First, IFRS classification: by making distributions discretionary and perpetual, the instrument booked as equity, not debt, which kept leverage ratios intact. Second, priority: Skadden drafted terms such that senior lenders were paid first, with the preferred cleanly subordinated above equity but below OpCo debt. That clarity cut uncertainty and let the deal clear at tighter margins.

PDP ABS (notes backed by already-producing wells) underline this point. Here, bonds are repaid only from current production. Contract terms (coverage tests, hedges, waterfall rules, etc.) feed straight into ratings models. Hunton Andrews Kurth and O’Melveny built templates that standardised such terms. Standardisation cut diligence time and expanded the investor pool. The effect was deeper demand and tighter execution.

Why lawyers set the cost of capital

Investors no longer underwrite stories. They underwrite enforceability. Five drafting levers now decide whether margins tighten or widen:

1. Perfection map

To prove enforceability, lawyers must show cash moving from the field to the invoice and into a controlled account. In London, that chain usually requires a legal assignment under s.136 Law of Property Act 1925 and account-bank acknowledgements. Bracewell, closing trader prepays, and Vinson & Elkins, structuring reserve-based/offtake hybrids, both put this map at the centre of their work. If any link is weak, investors assume leakage and widen the interest margin.

2. Payment redirection

After buyers get notice of an assignment, they must pay the assignee. Paying the wrong party risks double liability. To stop this, London transactions close with signed ABA letters. Bracewell, advising banks on trader prepays, makes these packages watertight so syndications clear at tight pricing. Even small gaps here push up the margin.

3. Waterfalls and hedge fit

In PDP ABS (bonds backed by already-producing wells), repayment depends on predictable decline curves. Investors pay tight margins only if the waterfall (who gets paid first) is simple, coverage tests are clear, and hedges match production. Kirkland & Ellis, on Diversified ABS VIII (2024) and ABS X (2025), drafted coverage tests and hedge definitions in plain numbers that Fitch could model directly. By making the model run cleanly, Kirkland helped lower the cost of debt.

4. Intercreditor and IFRS classification

Different financings all want the same cash. An English-law intercreditor sets the order of payment so lenders don’t clash. IFRS rules decide if an instrument counts as equity or debt. Get either wrong or investors demand higher margins. Skadden, on Venture Global LNG’s $3bn perpetual preferred (2024), made sure it booked as equity and sat cleanly below senior debt. O’Melveny and Hunton Andrews Kurth did the same in PDP ABS templates, giving investors clarity and cutting spreads.

Therefore, when firms draft clearly, investors can model, enforce, and recover. That clarity narrows margins. Where drafting is weak, the market takes price back through wider spreads.

Embedding hybrid finance in operations

Prepayments & offtakes 

A trader prepay is cash today for oil tomorrow. The trader wires money upfront; the producer repays in barrels.

Boards like them because they are quick and avoid issuing shares. Traders like them when receivables are assigned, accounts controlled, and hedges match production. Bracewell, advising banks on prepays, makes the contracts watertight so other lenders feel safe joining in. That wider demand means the loan closes quickly at a lower cost. The GeoPark–Vitol deal (2024) secured 20–36 months of flows with receivable and hedge control. BW Energy’s $80m Golfinho prepay (2023) used the same design at a smaller scale.

Weakness is costly. If hedges no longer match production, cash drains. If terms clash with RBL covenants, defaults loom. In distress, prepays can flip into control, as with Twinza’s 2025 debt-for-equity swap. Vinson & Elkins, in RBL/offtake hybrids, draft terms so receivables and security line up before capital enters.

As a result, prepays only price cheap when contracts prove every dollar of revenue flows into the right account.

Royalties, streams & PDP ABS 

Royalties and streams turn future oil into cash today. A royalty gives investors a share of revenue. A stream gives them barrels at a set price. PDP ABS (bonds backed by already-producing wells) repay investors from production that is already flowing.

These instruments only work when contract terms are clear enough to model. Kirkland & Ellis, on Diversified Energy’s ABS VIII (2024) and ABS X (2025), drafted coverage tests, waterfalls (who gets paid first), and hedges in plain numbers that Fitch could plug straight into its rating models, which naturally cut margins.

White and Case’s work on the Occidental → Elk Range $905m royalty carve-out (2025) showed the same point in practice: when entitlements are audit-ready and rights are robust, deals execute quickly and at tight pricing.

This shows that royalties, streams, and ABS only price well when rights are durable and definitions are model-ready.

HoldCo prefs & PIKs

HoldCo preferreds and PIK notes give sponsors flexibility while offering investors fixed returns. They sit above equity but below operating debt. They hence look like equity, but in practice they behave like junior debt.

These only price well when two points are solved: accounting and priority. If booked as debt instead of equity, leverage ratios worsen, and covenants may break. If distributions interfere with senior loans, investors demand a higher margin. Skadden, on Venture Global LNG’s $3bn perpetual preferred (2024), avoided both risks: it secured equity treatment under IFRS and drafted terms such that senior lenders were paid first. That clarity gave investors’ confidence and kept pricing tight. HoldCo prefs only work when the documents prove both accounting and priority are safe. If either is unclear, spreads widen fast.

As a result, no matter what the financing label is (prepay, ABS, royalty, or HoldCo pref), it matters less than enforceability. Firm activity in this area exemplifies the simple pattern that tighter drafting leads to tighter pricing. Therefore, if cashflows are provable, security holds, and control is watertight, investors accept tighter margins no matter what the instrument is called. When those tests fail, spreads widen, and execution slows.

Conclusion

Equity has not disappeared; it has been rebuilt inside contracts. Prepays, royalties, securitisations, and preferreds now deliver what stock once did. Each is judged by the same tests: cashflow certainty, enforceable security, and watertight control.

The cheapest capital will follow issuers who can prove enforceability on one page. That means assignments that hold, waterfalls investors can model, and rights that survive renewals. Law firms are not just documenting finance now; they are instead setting its price.

Looking ahead, expect English-law terms to become standardised. ABS and prepays will be recycled as repeatable tools, and traders will act as lenders with banks behind them. IFRS classification and hedge alignment will matter as much as tenor or margin. For the foreseeable future in upstream oil and gas, equity won’t be simply longer floated but drafted.

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BIBLIOGRAPHY

Legislation

• Law of Property Act 1925, s 136.

Regulator & Government Releases

• Australian Takeovers Panel, ‘Twinza Oil Limited – Panel Receives Application’ (TP25/075, 21 August 2025) https://takeovers.gov.au.

• ICCC (Papua New Guinea), ‘Notice of Proposed Acquisition of Shares by the Secured Creditors of Twinza Oil Limited and TOR Asia Credit…’ (22 August 2025).

Corporate & Market Announcements

• Business Wire, ‘Vitol and Breakwall Capital LP Announce the Formation of Valor Mining Credit Partners, L.P.’ (1 July 2025).

• BW Energy, ‘Third Quarter 2023 Results’ (16 November 2023).

• Diversified Energy Company plc, Form 6-K (17 March 2025).

• Elk Range Royalties, ‘Elk Range Royalties Announces Acquisition of DJ Basin Minerals & Royalties from Occidental’ (Business Wire, 21 March 2025).

• GeoPark, ‘GeoPark Signs New Offtake Agreement with Vitol for the Llanos 34 Block in Colombia’ (9 May 2024).

• London Stock Exchange (RNS), ‘Diversified Energy Closes Securitized Financing’ (2 June 2024).

Ratings Agency Publications

• Fitch Ratings, ‘Fitch Publishes Ratings of Diversified ABS VIII LLC A-1, A-2 & B Notes’ (27 June 2024).

• Fitch Ratings, ‘Fitch Publishes Ratings of Diversified ABS X LLC A-1, A-2 & B Notes’ (26 March 2025).

• Sustainable Fitch, ‘Second-Party Opinion: Diversified Energy Company plc – Sustainability-Linked Financing Framework’ (12 March 2025).

Law Firm Insights / Publications

• Bracewell, ‘Getting Your Carbon Credits Voluntarily’ (9 May 2024).

• Dentons, ‘Notice of Assignment: What Is It Good For?’ (practice note).

• Gatehouse Chambers, ‘Notice of Assignment – Section 136 of the Law of Property Act 1925’ (practice note).

• Hunton Andrews Kurth, ‘Oil & Gas ABS’ (practice note).

• Hunton Andrews Kurth, ‘Where Did Credit Risk Retention Go? The Implications for PDP Securitizations’ (23 October 2023).

• Kirkland & Ellis, ‘Kirkland Advises Diversified on Closing on an Asset-Backed Securitization’ (3 June 2024).

• Kirkland & Ellis, ‘Kirkland Advises Diversified on Close of Acquisition and Securitized Financing’ (28 February 2025).

• Latham & Watkins, Private Credit 2025 Outlook: Flexibility and Complexity Drive Private Credit Expansion (2025).

• O’Melveny & Myers, ‘Oil & Gas ABS: An Alternative Avenue for Financing’ (11 April 2025).

• Skadden, ‘Venture Global Offers Series A Perpetual Preferred Stock’ (9 October 2024).

Media / News Articles

• Jonathan Saul, ‘Red Sea Insurance Soars after Deadly Houthi Ship Attacks’ Reuters (10 July 2025) https://www.reuters.com.

• Reuters, ‘GeoPark to Access $500 Million from Vitol in Return for Oil Deliveries’ (10 May 2024).

• Reuters, ‘Occidental Petroleum Sells DJ Basin Mineral Position to Elk Range Royalties’ (21 March 2025).

• PR Newswire, ‘Venture Global Announces Closing of a $3 Billion Perpetual Preferred Stock Inaugural Offering’ (1 October 2024).