Oil and Gas Loans: Term Loans, Credit Lines and Well-Secured Advances

Term loans, lines of credit, development facilities and well-secured advances for drilling programs, workovers, infrastructure and growth, sized on what the project will produce.

Loan types by what you are funding

An oil and gas loan is matched to the use of funds and the collateral behind it. The same operator may carry three of these at once.

Drilling and completion: a development facility or a well-secured advance that funds the AFE, repaid from the new well's production
Production loans and reserve-based lines: a borrowing base on proved developed producing reserves, redetermined as production and prices change
Workovers, recompletions and infill: smaller term loans or draws against existing production to bring volumes back
Infrastructure: saltwater disposal wells, gathering lines, tank batteries and compression, underwritten on contracts or throughput
Business term loans and lines of credit: general working capital for an operating company with steady net revenue
Acquisition loans: senior debt on a producing-property purchase, usually paired with seller financing and equity

How a project loan is sized

Lenders do not fund a project because it costs a certain amount; they fund it because the reserves will repay it. The reserve report is run through the lender's own price deck, usually below the forward curve, and proved developed producing value carries most of the weight. Proved undeveloped locations get a steep haircut or none at all until drilled. The loan is then a fraction of that risked present value, with amortization that tracks the decline curve so the lender is repaid while the well is still strong.

For a single-well or small-program drilling loan the lender also looks at the operator's track record on offset wells, the completion design, the AFE versus actual on prior wells, and whether the operator has skin in the game. A conservative AFE with a credible type curve from nearby wells finances; a speculative exploration well generally does not, with debt.

Structures you will see on a term sheet

Expect a draw schedule tied to drilling milestones, interest-only through completion, then amortization from production. Covenants commonly include a minimum collateral coverage ratio, limits on additional debt, hedging requirements on a portion of production, and a cash sweep if coverage falls. Some private development lenders take a small overriding royalty or net profits interest in addition to interest; we price that into the comparison so it is not hidden.

What it takes to close, and how long

Equipment-backed and receivable facilities close in weeks. A drilling or production loan typically takes four to ten weeks, most of it the lender's engineering and title review. The file that closes fastest has a current third-party reserve report, lease operating statements, production history by well, title opinions, division orders, the joint operating agreement, a lien schedule and current financials ready on day one.

MercFinancial is a commercial funding brokerage, not a lender. Approval, loan amount, rate, term and funding are decided by the funding source on the strength of the file; nothing on this page is an offer or a commitment to lend.

Frequently asked questions

Can I get a loan to drill a well?

Yes, if the well is a development well with a credible type curve and the operator has a track record. Lenders fund drilling and completion through development facilities or well-secured advances repaid from production, and operators and investors can also finance their share of the AFE through a working-interest line. Pure exploration is usually equity, not debt.

How much can an operator borrow against producing wells?

A fraction of the risked present value of proved developed producing reserves, as calculated by the lender at its own price deck. The fraction and the price deck vary by lender and by market, which is one reason the same wells support very different loan amounts at different lenders. A reserve report is the starting point for any real answer.

What interest rate do oil and gas loans carry?

There is no single rate. Equipment and receivable facilities are priced near conventional commercial credit; development and production loans from private lenders are priced for energy risk and may add fees or a small royalty. Working-interest lines through MercFinancial can carry a 0% introductory rate for qualified borrowers for 12 to 18 months, then an index-based rate. Every term sheet is shown with its full cost of capital.

Do I need hedges to get an oil and gas loan?

For a reserve-based line, usually yes on a portion of production for the first one to three years; it protects the borrowing base and the lender will often require it as a condition of funding. Smaller term loans, equipment loans and working-interest lines generally do not require a hedge program.

Guides on this topic

Drilling and Completion Financing for Small Operators — How independent operators fund drilling and completion costs with debt, not equity: development facilities, well-secured advances, and AFE financing.
The Oil and Gas Loan Application Checklist: Reserve Reports to Title Opinions — An oil and gas loan application is built around a reserve report, lease operating statements, production history, title and division orders, hedging, environmental and plugging liabilities, and financials. Here is what each is for and where files stall.
How WTI Price Swings Change Your Borrowing Capacity — Lenders don't use the WTI screen price to set your borrowing base — they run reserves through their own price deck. Here is how that gap actually works, and what to do about it.
Financing Saltwater Disposal Wells and Midstream Assets — How saltwater disposal wells, gathering systems, and water midstream assets get financed — contract-backed underwriting, construction-to-perm loans, and lender fit explained.
Seven Reasons Oil and Gas Loans Stall or Get Denied — Seven documentation and structuring problems that stall or kill oil and gas loans in underwriting, and the specific fix for each one, from stale reserve reports to title defects.