Drilling and Completion Financing for Small Operators

By MercFinancial · Published 2026-07-18

How independent operators fund drilling and completion costs with debt, not equity: development facilities, well-secured advances, and AFE financing.

Small and independent operators finance drilling and completion costs the same way larger producers do — by borrowing against value that already exists or value the new wells will create, not by selling off working interest to raise cash. The toolkit is three-part: development facilities secured by producing wells already on the lease, structures where a lender advances against the new wells’ own projected cash flow, and equipment or working capital lines that free up cash to cover the AFE. Almost no lender funds the full D&C budget outright; plan on financing 50 to 75 percent of engineered cost and carrying the rest from cash flow or existing equity.

If you’re reading this with a proved undeveloped location, a signed AFE, and not quite enough cash in the operating account, you’re in the position this guide is written for. The gap between “we know this well will produce” and “we have the capital to drill it” is one of the most common financing problems in the upstream space, and it is solvable with debt — you don’t have to bring in a working-interest partner or dilute your position to close it. This isn’t a guide to raising equity or syndicating a program to outside investors. It’s about borrowing against what you’ve already built — your producing base, your reserves, your AFE — to fund the next well without giving up a piece of it.

“We had the location proved up and the AFE signed, but the bank wanted three years of tax returns and a real estate lien before they’d even look at it. We needed a lender who understood the well itself was the collateral.”

The Direct Answer: How Operators Fund Wells Without Selling Working Interest

Most funded drilling programs blend some combination of three debt paths:

• Development facilities — a revolving or term loan secured by existing producing developed (PDP) reserves, sized off a borrowing base, with draws released as the drilling budget progresses.
• New-well-secured advances — financing structured around the specific wells being drilled, sized and repaid primarily off those wells’ own projected cash flow rather than the operator’s whole producing base.
• Equipment and working capital layers — financing for rigs, tubulars, tanks, and gathering equipment alongside the D&C budget, plus lines that keep the operating account liquid while AFE draws go out.

None of these require selling a piece of the well to a passive investor. They’re all forms of borrowing — you keep 100 percent of the working interest, pay the lender back out of production, and once the note is retired the asset is entirely yours. That’s the core difference between what this article covers and a working-interest raise: operators often assume “drilling capital” automatically means bringing in a partner. It doesn’t.

Sizing the Ask: Turning Your AFE Into a Financeable Capital Plan

Your AFE is the starting point for any lender conversation, but it alone isn’t a financing package. Lenders want it translated into a plan showing where money comes from at each stage: drilling costs (rig rates, mud, casing, cementing, directional), completion costs (perforating, stimulation, flowback, artificial lift), facilities and tie-in (tanks, separators, gathering, SCADA), and contingency — most lenders want 10 to 15 percent built in.

Size the ask realistically from there. If a lender will advance 60 percent of engineered cost, the remaining 40 percent has to come from somewhere concrete — cash flow, cash on hand, or a second financing layer such as an equipment lease. A plan that shows how every dollar gets covered, not just the financed portion, moves through underwriting faster.

Development Facilities: Borrowing Against Existing PDP to Fund New Drills

The most common way an operator with an existing producing base funds new development is a facility sized off that base — the same borrowing-base mechanics used in reserve-based lending, applied here to fund the next round of drilling rather than an acquisition. The lender’s engineers evaluate your PDP reserves, discount for price and risk, and set a borrowing base; draws are released as the program hits milestones — spud, casing set, completion, first production.

This works well for an operator who already has cash-flowing wells and wants to fund infill or step-out locations on the same lease. The existing production does double duty: it supports current cash flow and collateralizes the loan that drills the next well. The tradeoff is that your borrowing base moves with prices and reserve reports, so a facility sized in a strong price environment can shrink at redetermination — worth planning around before you commit next year’s budget to it.

Structures Where the Lender Advances Against the New Wells Themselves

Not every operator has enough PDP to support a facility sized for a full drilling program. When that’s the case, some capital providers will advance funds structured primarily around the new wells themselves — a category sometimes referred to informally as a DrillCo-style structure. It sits closer to the line between debt and a working-interest arrangement, and the terminology gets used loosely in the market.

In a typical version, the capital provider funds most of the D&C cost for a defined set of wells and is repaid on a priority basis out of those wells’ cash flow — often with a target return and a mechanism for the operator to recapture more of the economics once that return is hit. Some versions are structured purely as debt with a security interest in the new wells; others involve a temporary working-interest carve-out that reverts to the operator after payout. Read the reversion mechanics and the definition of “payout” closely before you sign anything. For most small operators, the honest comparison is a straight development facility: a well-secured advance can get a program drilled when PDP-based capacity falls short, but it typically costs more — a fallback, not a first choice.

Layering Equipment and Working Capital Financing Around the D&C Budget

A drilling program rarely draws down a single line item. Operators commonly stack financing so each piece is matched to the asset or cash flow that actually secures it:

• Equipment financing for tanks, compressors, and gathering equipment — often cheaper than folding hard assets into a reserve-based facility, and it preserves borrowing-base capacity for the drilling itself. See how the lease-versus-loan math works.
• Working capital lines to keep payroll, vendor payments, and lease operating expenses current while AFE draws are in process and before first sales checks arrive.
• Joint interest billing receivables financing if you operate wells with non-operating partners — converting outstanding JIB balances into cash instead of waiting on a slow-paying partner.

A hiccup in one layer doesn’t stall the drilling budget if working capital is financed separately.

What Lenders Require: Offset Production Data, Engineering, and Operator Track Record

Every lender is underwriting one core question: how confident are they the well produces enough, fast enough, to service the debt. Gathering the document set that builds that confidence up front is the biggest thing you control:

• Offset well production data from analogous wells in the same formation, showing decline curves the new well is likely to follow.
• An independent or in-house reserve engineering report supporting the projected type curve and EUR.
• Title and lease documentation confirming clean working interest and that AFE partners are accounted for.
• Operator track record — prior wells drilled, actual-versus-AFE cost performance, time to first production.
• Current financials and existing production data if any part of the request is secured by an existing base.

A full checklist of what shows up across upstream credit files is covered in what oil and gas lenders look for, but the drilling-specific point is this: engineering and offset data carry more weight here, because the collateral doesn’t exist yet. The lender is underwriting a projection, and the quality of the data behind it determines both whether the deal closes and how much leverage you get.

Common Deal Killers in Drilling Finance and How to Avoid Them

A handful of issues account for most declined or stalled drilling finance applications:

• Incomplete or stale AFEs. A six-month-old AFE, or one missing a facilities and tie-in line, forces the lender to guess — and guessing works against the borrower.
• Title problems on the new location. Unresolved lease issues or unaccounted-for working-interest owners stop underwriting cold until cleared.
• Offset data that doesn’t match. Comparisons pulled from a different formation weaken the projection the lender is relying on.
• Thin operator history. A first-time operator faces more scrutiny and typically lower leverage — not a dead end, but a reason to expect a smaller advance.
• Underestimating price sensitivity. A plan built entirely around a strip price that assumes no softening can fall apart quickly if prices move against the program.

Getting Pre-Approved Before You Spud

The operators who finance drilling programs with the least friction line up capital before the AFE is finalized, not after:

MercFinancial is a brokerage, not a single balance-sheet lender, so we match the request against 160+ wholesale lender relationships and structure the development facility, well-secured layer, or equipment piece against whichever lenders actually understand upstream credit for a program your size. More on how we work with independent operators.

Frequently Asked Questions

Can I get a loan to drill a new oil well?

Yes. Independent operators regularly finance new drilling through development facilities secured by existing producing reserves, or through structures advanced against the new well’s projected cash flow. Approval depends on offset production data, engineering support for the projected reserves, and your track record as an operator — not on selling a piece of the well.

What is an AFE and why do lenders ask for it?

An Authorization for Expenditure is the itemized cost estimate for drilling and completing a well — rig time, casing, cementing, completion, facilities. Lenders use it as the baseline for sizing how much they’ll advance and for tracking that draws match actual progress, so an incomplete or outdated AFE is one of the fastest ways to stall underwriting.

Do lenders finance 100 percent of drilling and completion costs?

Rarely. Most drilling and completion financing covers roughly 50 to 75 percent of engineered cost, with the operator covering the balance from cash flow, cash on hand, or a second financing layer such as equipment or working capital funding. A capital plan that accounts for the full AFE — not just the financed portion — underwrites faster.

What track record do I need to finance a drilling program?

Lenders look for prior wells drilled, how actual costs compared to the AFE, and time to first production. A first-time operator isn’t automatically disqualified, but should expect closer scrutiny, more conservative leverage, and possibly additional structure until a track record is established.

This article is for educational purposes only and is not financial advice. Loan programs, rates, and approvals vary by lender and borrower profile.