DALLAS—“Equitize” is the new verb making the rounds in the oil and gas community. Capital is going to be required in ever-greater amounts, and soon, advised Steve Trauber, vice chair of Citi and head of the firm’s global energy investment banking group.

Speaking at Oil and Gas Investor’s recent 15th annual A&D Strategies and Opportunities Conference, Trauber warned that the call on equity capital looks to be increasing soon, and debt will no longer be the solution to it.

Drilling fewer wells today will bump up against rising global energy demand later, and fixing that supply crunch will require more rigs getting back to work. At the same time, E&P companies need to be sure they have enough capital to execute their business plans, strengthen their balance sheets or pay promised dividends.

“We think, going forward, the most important thing for any operator is how to fund your business plan. There is going to be less debt available and it’s going to cost more, so debt is not the answer you had over the last decade. It’s going to have to be equity capital--and I would argue that’s going to be limited as well,” Trauber said.

“We’re north of 400 U.S. rigs now, going to 650 or even 1,000 by the end of 2018. That’s an increase of 400 rigs and $400 million of capital per rig for one year, or $40 billion of capital, that’s going to be required just for the U.S. onshore. Globally, it’s $150 billion. If you think about it, which capital markets are you going to access for that?”

Trauber warned the oil and gas sector needs even more capital. “Let me ask you this: if Saudi Aramco goes public with $100 billion of equity, where is that capital going to come from? It’s not just out there sitting on the sidelines; it’s got to come from somewhere.

“And finally, I’ve got a list of 20 to 25 names in the upstream that we expect to at least look at going public in the next 12 to 18 months; that’s a lot of equity capital going to Aramco and IPOs that’s got to come from somewhere,” he said. “We can talk about private equity having $100 billion or $150 billion of firepower, but we’ll need more than that.

“This is where the average rock star banker says, ‘No problem; I can deliver that for you.’ Well, I would challenge that.”

Trauber said he expects four or five upstream IPOs could hit the market by year-end.

In the meantime, investors are still focused heavily on balance sheet repair, increasing corporate liquidity and the ratio of net debt to EBITA. The correlation of equity values to production growth has dissipated a bit as stockholders now look for strong balance sheets. Therefore, companies that can issue equity are doing so. In fact, year-to-date, E&P equity issuance has been strong and looks likely to surpass that of 2015.

Two E&Ps have issued high-yield debt this year, a sign that that market is reopening to oil and gas stories. Since March 2016, the energy high-yield secondary market has had one of its strongest runs in history, up more than 30%, with the highest quality credits (the top third) substantially outperforming, Trauber said. Since April, eight midstream companies, two E&Ps and two service companies have accessed high-yield. So-called Bought bond deals are now being offered to the higher quality credits as well.

Acquisition funding makes up about one-third of the use of proceeds from equity issuance year-to-date, and almost three-fourths of that has been for deals in the Permian Basin.

“The risk of drilling a well has gone down dramatically but I would argue the risk in the sector is only going up,” Trauber said. ”How do you fund growth in energy demand going forward? I think the way to protect yourself is to strengthen your balance sheet. Don’t let your strategy be held hostage by not having access to that capital. It will not be there for everybody who needs it, so you need to take the first-mover advantage.”

Trauber said Citi tends to be very bullish, seeing $50 per barrel (bbl) to $60/bbl with the potential for price spikes.

“We think the lack of investment in 2014,’15 and ’16—and probably in ’17—will create a massive contraction in the supply curve. Where is oil going to be in 2022 or 2022? Our outlook requires increased drilling.”

Leslie Haines can be reached at lhaines@hartenergy.com.