Launching a banking career in the midst of a financial crisis seems counterintuitive, but that’s exactly what engineer Cliff Vaz did when he joined Citi as a summer associate in 2008. “As everyone was running for the exits, I was running into the building,” he recalled.

Vaz began his professional life as an R&D engineer, first for an alternative energy company and later for ApJet, where he worked on atmospheric plasma technology. He holds seven patents from those years.

Ready for a change, he joined financial forecasting company Strategic Analytics Inc., and a year later entered the MBA program at the University of Texas, Austin, where a Citi banker who was judging a finance contest suggested he try investment banking. He landed an internship and joined full time after completing his business degree. Today he is a vice president in corporate banking, overseeing reserve-based lending for a portfolio of upstream companies.

Vaz holds degrees in economics from the College of Wooster and in chemical engineering from the University of Iowa. In a recent interview, he discussed banking trends, the recent redetermination season and the future of upstream finance.

Investor What size is Citi’s upstream portfolio?

Vaz We have a strong roster of upstream clients, both investment-grade and noninvestment-grade. I focus primarily on the noninvestment-grade space. Energy reserve-based lending wasn’t Citi’s traditional bread and butter, and it’s been a great opportunity for me as it has grown. I had a valuable mentor in my boss, Phil Ballard. We experienced the boom years, and now we’re experiencing the other side of the coin, which is equally important. You have to appreciate the cycles to be a good banker.

Investor What’s happening in the upstream space?

Vaz The main backdrop, of course, is the fall in crude prices from above $100 to the mid-$20s range in the course of about 18 months. The other element is regulation, which is changing the way banks do business and makes capital access tighter. It is forcing leverage out of the system.

Investor As you point out, that’s a challenge, because the upstream is capital-intensive.

Vaz I suspect alternative capital providers will furnish the capital that banks no longer provide. The capital will be higher cost but reasonable enough that companies will consider it as an alternative to being indirectly governed by bank regulations.

As the bottom is reached, private equity money on the sidelines will find its way in. You’ll see first-lien debt coming from nonbank entities. That’s a very interesting development.

Investor What’s the effect on E&Ps?

Vaz Companies still able to drill are becoming more efficient by the day. You don’t need $100 oil to make the returns you made two years ago. You maybe need $60 to $80, because the capital is much more efficient. One of our engineering colleagues pointed out that the crews that are still drilling are the best crews out there. That efficiency is a powerful weapon toward achieving returns in a depressed environment.

Investor Have we hit bottom?

Vaz There seems to be less downside and more upside to prices. Most experts are projecting by the end of the year we’ll have a five handle on prices, some say six. It’s less than a 12-month recovery to where drillers come back into the market, even at $50 or $60.

Investor How has redetermination season played out?

Vaz Price decks have gotten extremely low and hedges are rolling off, hence impacts are significant. Deductions of 20% to 30% from borrowing bases are not out of the ordinary. The fact that prices have risen somewhat since February doesn’t mean banks will raise decks—not until they see stability in the $40 price. There are haves and have-nots. Companies that have fixed their balance sheets will be fine. Others will struggle.

Investor What’s an example of a ‘have?’

Vaz Without mentioning specific names, one company bought assets and hedged them five years out from Day One. The company’s performance has been rock steady even as prices have dropped to a fifth of what they were at the time of purchase. It locked in returns, was agnostic on commodity prices and did not over lever.

By contrast, another firm, which is in bankruptcy, did deals over the past five years that were essentially heavily levered and haven’t worked out in today’s price environment. Those capital structures were designed to withstand only moderate reductions in prices. The lesson is you can’t plan for business as usual.

Companies have to decide whether they want to be a pure play on commodities or a returns play. In one example of what it takes to get to market in this environment, a company put in significant natural gas hedges and credit enhancements to help maintain cash flow for the next few years to support an acquisition. It was a very different looking deal than anything done in the past two years.