HOUSTON—Since the downturn began, GSO Capital Partners LP—the mezzanine and credit arm of New York City-based private equity behemoth Blackstone, has planted some $7 billion into the oil and gas sector, according to senior managing director and GSO co-head Robert Horn, and that’s a decision based on timely opportunity and industry optimism.

“We do firmly believe that we will regret not deploying capital in this kind of market, both into our existing investments and into new investments,” Horn said to members of IPAA and Tipro at a recent event in Houston.

“We think this is a great time to be funding M&A, funding drilling and funding midstream build out.”

GSO has invested $5.5 billion in new upstream investments since January 2015, and another $1.5 billion into existing investments.

“It is a particularly interesting time given some of the constraints that we see in the banks and the capital markets,” Horn said. “Institutionally, we do believe in the sector, and we do believe we will see a recovery or that companies will continue to adapt until they are profitable.”

In the new economic environment, finance structuring takes on a whole new level of importance, he said. Before the downturn it didn’t matter whether debt was secured or unsecured, or treated as preferred equity.

“But now we’re trying to solve for the needs of regulators and credit and equity investors. We’re trying to design structures that are not too dilutive and that work well with bank debt.”

One big area of activity for GSO in the past few months has been to help companies pay down revolvers and provide more liquidity. “We’ve done a lot of preferred equity investing because we were able to structure things that are less dilutive and that are treated as equity for purposes of accounting.”

Leverage limits are a motivating factor for companies seeking GSO’s cash, he said. “If you have a revolver, you can’t raise debt over 3.5 times.”

Acquisition financing, however, is the company’s primary driver at present. GSO has placed some $1 billion in commitments to support approximately $7 billion in upstream deals.

When GeoSouthern Haynesville LP acquired Encana Corp.’s Haynesville Shale position in 2015, the acreage was largely undeveloped with a minimum volume commitment.

“After a bit of thought about how to structure that, we decided to just do it all equity—preferred as well as common. We felt it was important to have a capital structure where we could put capital in the ground and not have to pay coupons to us, for example, to be able to weather the downturn.”

The issue when Sanchez Oil & Gas Corp. stretched to buy some 155,000 net acres in the Eagle Ford Shale from Anadarko Petroleum Corp. for $2.3 billion was “the sheer size of the transaction,” Horn said.

To get the deal done, GSO partnered with its parent, Blackstone, and together was able to provide some $2 billion to complete the transaction.

“We brought the producing assets into a separate subsidiary and did a financing primarily against the producing assets to give Sanchez a higher exposure to the undeveloped assets and the growth, which is what they were looking for.”

And recently, in June, GSO participated with Carrizo Oil & Gas Inc. in its $648-million acquisition of Delaware Basin assets from ExL Petroleum Management LLC. To help fund the cash portion of the deal, GSO acquired $250 million in preferred stock from Carrizo in exchange for a quarterly dividend.

“We structured it so it would receive equity treatment for accounting under the bank deal, and that was really important to them. It was also minimally dilutive, which was helpful given the equity markets have been at recent lows.”

About 85% of GSO’s current fund is invested in the upstream sector, although it targeted a 70% investment balance to upstream. “We react first to where we see the opportunity, and then look in the rearview mirror to see if we should adjust.”

Horn believes the oil market is “modestly oversupplied” and that a recovery is imminent based on the expectation that OPEC is targeting a price higher than $50/bbl—although “we can debate how much influence OPEC continues to have.”

Regardless, U.S. E&Ps are amazingly adaptive and will find a way to profit, he said.

“It’s hard to predict commodity prices, but companies react and change their costs and find new opportunities. We do believe in a recovery in the sector, but more than anything we believe companies can react to create value.”

Steve Toon can be reached at stoon@hartenergy.com.