Oil and Gas Project Financing: Development Drilling, PUD Conversion and Midstream Projects

Capital for the project in front of you, whether a development drilling program, a PUD conversion, a gathering system or a saltwater disposal well, structured from the debt, DrillCo, mezzanine, equipment and partner capital that energy lenders actually provide.

What project financing means in oil and gas

A project loan funds something that does not produce yet and is repaid from what it will produce once it is built. In oil and gas that is usually a development program on acreage the operator already holds, or a piece of infrastructure that earns fees or saves costs on existing production. The lender is underwriting a plan, so the file has to show the plan: what will be drilled or built, what it costs, when it starts producing or earning, and what is already producing to carry the debt in the meantime.

Few energy lenders fund a project on its own risk. Most financings combine a base the lender can value today, typically proved developed producing reserves or a contracted cash flow, with a structure that funds the new work in stages as it proves up. The structures below are how that is done.

Development drilling programs: infill and step-out wells on held acreage, drilled in phases
PUD conversion: turning proved undeveloped locations in the reserve report into producing wells
Recompletions, refracs and workovers that add proved developed production to existing wellbores
Gathering lines, compression and other midstream assets that move production to market
Saltwater disposal wells, water gathering and water-transfer systems
Production facilities: tank batteries, separation, treating and electrification of a field

The financing structures lenders actually use

Each structure answers a different question: how much the existing production can carry, who takes the drilling risk, and how much of the upside the operator is willing to share. Most projects use two or three of them together.

Reserve-based lending with a development tranche: a borrowing base on PDP reserves, plus availability that grows as new wells come online and are added at the next redetermination
DrillCo and drilling funds: a financial partner pays most or all of the drilling cost for a defined set of wells in exchange for a working interest in those wells that steps down once the partner reaches an agreed return
Mezzanine and second-lien term loans: subordinated debt above the senior facility, priced higher and sometimes carrying an override or warrants, to fill the gap between senior debt and equity
Equipment financing and leasing: rigs, compression, pumps, separators and water-handling equipment financed on the asset itself rather than on the reserves
Net profits interests and volumetric production payments: the sale of a share of future production or profits for cash today, used mainly by larger producers with long-lived PDP reserves
Joint ventures and farm-outs: a partner earns an interest in acreage by funding the drilling, and the operator keeps a carried interest without borrowing
Sponsor equity: the operator's or its investors' own capital, which every lender expects to see at risk beside the debt

What lenders look for in a project file

The questions are the same whichever structure fits. A lender wants to see the value and the risk of the project in documents it can test, not in a forecast it has to take on faith.

A current reserve report from a qualified engineer, with PDP, PDNP and PUD reserves and their PV-10 broken out by category
A development plan with AFEs for each well or facility, a schedule, and the type curve or offset production that supports it
The operator's track record: wells drilled, costs against AFE, production against forecast, and regulatory standing
Hedging on a share of forecast production, or a plan to put hedges in place at closing
Clean title on the leases being developed, with division orders and existing liens scheduled
Offtake and midstream contracts: crude and gas purchaser agreements, gathering and processing terms, and throughput or dedication contracts for SWD and water assets

Realistic timelines

Equipment financing often closes in one to three weeks. Reserve-based facilities, development tranches and acquisition-style loans typically take four to ten weeks from a complete file, because the lender runs its own engineering and title review. DrillCo, joint venture and mezzanine structures take longer still, since the economics, the reversion terms and the intercreditor arrangements with the senior lender are negotiated deal by deal. The biggest delays we see are a stale reserve report, AFEs that do not tie to the development plan, and title work started after the term sheet instead of before it.

How MercFinancial places project financing

We start with the project and the producing base under it, model which combination of structures it supports, and build one file in the form an energy lender's engineer and credit committee expect. The file then goes to the funding sources in our network of more than 160 lenders that finance that kind of project at that size: private production lenders, energy credit funds, equipment lenders and capital partners. You compare real term sheets on leverage, cost, covenants and how much of the project you keep before you commit to anything.

Pre-approve in minutes with Stephanie, our AI lending assistant, or call (830) 587-5022 and speak with an energy financing specialist in Houston.

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

What is oil and gas project financing?

Capital for a specific development or infrastructure project, such as a drilling program, PUD conversion, gathering line, saltwater disposal well or production facility, repaid from the cash flow the project will produce. In practice energy lenders usually combine it with existing production or contracted revenue they can value today.

How do you finance an oil and gas drilling project?

Usually with a mix: a reserve-based facility on existing PDP production with a development tranche, a DrillCo or joint venture partner that funds the wells for a share of them, mezzanine debt for the gap, and the operator's own equity. Which mix fits depends on the producing base, the quality of the locations and how much of the project the operator wants to keep.

Can PUD reserves be financed?

Rarely on their own with senior debt. Lenders include proved undeveloped reserves in a borrowing base at a small fraction of their value or not at all. PUD development is typically funded by a development tranche that grows as wells come online, by a DrillCo or drilling partner, or by equity, with the PDP base carrying the senior debt.

What are the main oil and gas financing structures?

Reserve-based lending, term loans amortized to the decline curve, mezzanine and second-lien debt, equipment financing, DrillCo and drilling funds, net profits interests and volumetric production payments, joint ventures and farm-outs, and sponsor equity. Each one shifts drilling risk and upside differently between the operator and the capital provider.

What is a DrillCo?

A financing arrangement in which a capital partner pays all or most of the drilling cost for a defined set of wells and receives a working interest in those wells, which reduces once the partner earns an agreed return. The operator develops acreage without borrowing against it, at the cost of sharing the production from those wells.

How long does oil and gas project financing take to close?

Equipment financing often takes one to three weeks. Reserve-based facilities and development tranches typically take four to ten weeks from a complete file. DrillCo, joint venture and mezzanine structures take longer because their terms are negotiated deal by deal. A current reserve report and AFEs ready at the start are the biggest accelerators.

Does MercFinancial fund oil and gas projects itself?

No. MercFinancial is a commercial funding brokerage. We structure and package the file and place it with the energy lenders and capital partners in our network; they underwrite, fund and hold the financing. Nothing is offered or committed until a funding source approves the deal.

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.
How Reserve-Based Lending Works for Oil Producers — How reserve-based lending turns PDP reserves into a borrowing base, with typical advance rates, covenants, and pricing for oil and gas producers.
Joint Venture Partner or Debt: Which Capital Fits Your Oil and Gas Project? — Debt keeps your ownership but demands repayment from a declining asset; a partner takes part of the upside but shares the risk and funds what lenders will not. Here is how to weigh selling interest, farm-outs, carries and DrillCos against borrowing.
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.
What Oil and Gas Lenders Look For: A Data Checklist — The document checklist energy lenders expect before they price a deal: reserve report, LOE detail, hedge book, title status, and financials, explained item by item.
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.