Left to right: Roger Diwan of IHS CERA, Bobby Tudor, Nate Walton, Adam Pierce, Geoffrey Davis and John B. Connally.

Money is intertwined with deal-making like sauce smothers barbequed beef; you can’t separate them. Likewise, corporate finance and the merger or asset sales outlook are being smothered by the downturn, speakers said during a panel at IHS CERA­Week in Houston in February.

But growth is in the industry’s DNA, said one, so the moderator, IHS vice president Roger Diwan, asked five panelists about the direction of capital markets. They touched on distressed debt, when and how private equity will act, loan redeterminations and more.

Here is a sampling of comments from the discussion, edited for length and clarity. The session opened with speculation on mergers, buying debt and other “rescues.”

Geoffrey Davis, managing director, Morgan Stanley This year more companies will have to put their assets in play, but for the buyers, the assets have to be equal to or better than what they already have. The debt markets are difficult to negotiate, and the bondholders are saying that no single one of us wants to step out and be the first. We are all fascinated by how this is going to play out.

John B. Connally, partner, energy, Vinson & Elkins There’s been a real reluctance to buy distressed debt. I think the three categories in terms of activity are: 1) transactions where two companies for whatever reason have some rationalization of their assets, or can come together and bring things uniquely to the two of them that make sense from the standpoint of reducing cost or putting together acreage positions; 2) The permission that some of these companies … having high leverage, have holes in those arrangements that permit them to do certain transactions, either net profits interests or VPPs, perhaps DrillCos. We’re seeing people look at those as a way to get some value without tripping up existing covenants; and 3) We’re finally starting to see more asset-level M&A, even though it’s moving a little slowly, but it’s going to increase, just as the level of distress increases as more companies go through processes, and as the panel said, liquidation really becomes required in order to try to preserve any value of the estate.

Bobby Tudor, CEO, Tudor, Pickering, Holt & Co. There will be some forced selling with some of that being companies that have no choice, but for the most part those are not going to be top-tier assets. There may be some corporate consolidation, but for now, it’s all about the macro: Buyers need confidence about oil prices on the back end. We just don’t have the buyers—the number of companies willing to put their balance sheet at risk is a very short list; generally speaking, they are not short of inventory in North America anyway.

One of the hardest parts of being in this cycle is being able to deploy capital. Once buyers see the light at the end of the tunnel and want to buy, the sellers will see the price signal too and pull back. And, if you’re the owner of a company, you want to play out your options as long as possible.

Davis Regional banks are stressed now. I don’t know that anyone wants to hurt their relationships with clients; we are watching it carefully. Drawing down your facility, issuing equity or selling assets seem to be the three things people are doing.

Diwan What do you expect this spring with the next round of redeterminations?

Tudor They are going down and going down in a big way. Last year the redeterminations were really pretty modest, but we’re expecting an average of 25% this spring, and that implies some will be down 50%, so there will be some forced things happening. There are going to be a lot of games of chicken.

Nate Walton, partner, Ares Management Private equity funds that are into the second or third year of their fund may think that they have to act [deploy capital], so they will help get some deals done now, but it will be very disciplined.

Adam Pierce, managing director, Oaktree Capital Management We … have to be cognizant of being disciplined.

Tudor The equity window has opened up a lot in the last two weeks, and why? Because Wall Street is making money, and they will continue as long as they can make money. I have a very cynical view on how long memories are in the financial markets, although it will be a long while before we get back to covenant-free deals.

Connally Since 2008, we’ve had a dramatic expansion of the geography of gas gathering assets in North America … the bankruptcy process has gotten more complicated since the development of shale reserves. The reality is, something has to happen to these assets during a bankruptcy process; they do require a willing buyer to come in, and the creditors have to approve that, as does the court.

Walton I’d remind the audience that 80% to 85% of U.S. production is by large investment-grade companies, so don’t wait for the bank­ruptcy process.

Connally Capital budgets for the large companies are more important than the bankruptcy process.

Pierce There’s a whole 363 [sales] process behind this [buying assets out of bankruptcy] and it depends on the players and how the negotiations go. The 363 process is interesting.

Walton The bondholders who bought distressed debt at 70% now have seen that decline to 10%, so they have no choice but to play it out.

Tudor The vast majority of these public E&P companies have no positive asset value. You have to get to $50 or $60 [per barrel oil], so you have to build in longer-term price decks. You can’t tell your boss you want to use your balance sheet to pay $55 for assets when oil is at $30. He’ll say, ‘Get out of my office.’

Davis Only a few plays are economic at $30—maybe some parts of the Permian, maybe some parts of the Utica. Companies that are unconventionally focused will have a harder time coming out of this.

Tudor Doubt has now crept in on whether the U.S. unconventional business will ever yield positive returns again. For every dollar put in, $1.50 has been put back into the business, so it hasn’t been positive yet. It will be interesting to see if international buyers will come back. They are challenged right now, too. Realizations are down everywhere. The buyers’ strike is global in nature. It’s not at all clear that they’ll be back with the same enthusiasm they had from 2005 to 2012.

Will the U.S. producer continue to be the high-cost producer? That’s changing—what used to require $60/bbl is now $50 and so on. We’re quite confident in the long term of the U.S. onshore market being able to compete with E&P opportunities anywhere in the world.

Diwan What about midstream deals?

Tudor There’s not much for sale, and what is for sale trades at a high multiple. The midstream in North America is just short of product for sale, but there are plenty of buyers.

Davis These are the times when for a banker, you want to use every tool in your toolbox—M&A, hedging, advisory. It’s a chance to be relevant to our clients and present interesting ideas to them, to run another model. We spend a lot of time on pro forma M&A modeling.

Connally We are trying to find alternative structures like the DrillCo, where you have upside, and we can rationalize the perspectives of both sides. We’re trying to come up with deal structures that reconcile different objectives and that match what our clients are trying to achieve.

Tudor It’s true that our clients need us more than ever; the difference is, what can you get done? It’s restructuring, debt for equity swaps, lots of equity issuances lately … shareholders may not like it, but they say, ‘If what I’m trading is dilution for survival, I’ll take dilution.’

Walton They are not doing this to drill in 2016, they are doing this to shore up the balance sheet and pay down debt, not to spend more.

Pierce If you’re a company that can move some of the bondholders further up the balance sheet, you do it.

Diwan Why is so much private equity on the sidelines? We hear there is $100 billion.

Tudor I think because they’ve had to mark down so much of what they invested in a few years ago.

Pierce Value has started to creep up in other asset classes, and investors are saying, ‘Gosh, I guessed wrong on commodities in 2015,’ so it’s a lot harder to convince yourself, ‘Well this year, I’ll be right.’ It’s hard for generalist funds that are still licking their wounds.

Walton There are a lot of differences among private equity funds, so that $100 billion is not all alike. Lots of these funds may know how to value an asset but don’t know how to buy it in a bankruptcy process. Bonds with change-of-control puts make restructuring difficult and make any kind of consolidation difficult.

Diwan Two or three years from now, what will the sector look like?

Walton We will probably stop talking about where is the next play. No more constant euphoria about the next play. It will be more about development, and what the price is for that development.

Tudor How long will it take for us to be a growing industry again? Because we were for five years, and now the pendulum has swung to returns, not growth. Investors say, ‘Don’t grow; create a return on capital.’ The services sector is meaningfully diminished—we needed 1,800 rigs to grow, but we’re at 500 now, and we think we’ll need only 1,100 rigs to grow going forward.