As oil and gas M&A activity has surged over the past two years, a relatively new financing structure has quietly moved from the margins of the market to the centre of some of its most competitive deal processes. PDP securitization, the asset-backed financing of proven, developed, and producing oil and gas assets, has grown from a niche proof of concept into a mainstream capital markets product, and its influence on how upstream deals get done is accelerating.
Peter Walgren, Co-Head of Securitized Markets Group Capital Markets at Jefferies, and Niall Devaney, Senior Vice President at Jefferies, sat down at the firm’s annual Energy & Power Summit to explain how the product works, why it has caught on, and where it is headed next.
What Is PDP Securitization?
The asset class was invented around 2019, and its logic is straightforward. An oil and gas operator takes a pool of producing wells (assets with a known, measurable decline curve) and places them into a separate legal entity. The commodity price risk and basis risk on those assets are then hedged out, typically covering 80% of production over five to eight years. With fixed commodity prices, fixed basis risk, and fixed-rate debt sold primarily to insurance companies and institutional investors, the only remaining variable is operational risk: something investors in the space have become comfortable underwriting.
“By making these variable things fixed, we can make the asset an investment grade asset,” said Walgren. “That unlocks investment grade rated cost of capital for companies that would never imagine issuing single-A rated debt.” The result is senior bonds pricing at mid-one hundreds to low-two hundreds spread to treasuries, with a weighted average cost through the capital stack of around 2.5% over treasuries — a mid-six yield that is substantially more attractive than what issuers could access through high yield or reserve-based lending markets.
For investors, the appeal is equally clear. “The corporate credit market offers 75 to 150 basis points over treasuries,” explained Devaney. “What we can offer through securitization is 200 to 250 basis points: investment grade credit with meaningfully better yield.” The bonds amortize in line with the underlying asset, creating a steady return of capital that investors can redeploy into new issuances, giving the market a natural velocity that sustains demand over time.
From Portfolio Tool to M&A Weapon
The product launched as a capital structure optimisation tool, a way for long-term asset owners to monetise future production without going through a full sale process. That use case remains active, but the more significant recent development is its growing role in M&A.
By providing investment grade financing at up to 70% loan-to-value against the present value of the assets (a level that would be unachievable in a traditional reserve-based lending structure), PDP securitization allows buyers to enter competitive processes with a materially stronger bid. “Putting low-cost, fixed-rate funding at a 70% LTV against the present value of the asset makes the bidder a compelling bidder,” said Walgren. Devaney added that in the current environment, where near-term oil prices have risen sharply, the hedging requirement built into the structure offers an additional advantage: it locks in those elevated prices at close, whereas a conventional sale process may or may not capture them.
The structures are also portable; they can travel with the assets through subsequent transactions and Jefferies has developed a bridge product that allows buyers who are new to the structure to step into it at day one of closing, lowering the friction for first-time issuers.
A Market With Significant Room to Grow
Since its inception in 2019, the PDP securitization market has seen approximately $20 billion of issuance across more than 15 issuers, with deal sizes growing from sub-$500 million to routinely exceeding $1 billion. Walgren sees a clear pathway to the market reaching the scale of comparable esoteric ABS categories: data centre securitizations, fibre networks, and whole business securitizations have each grown into $40 billion asset classes.
The most active issuers to date have been small and mid-cap private companies without access to the investment grade market, but the largest user of the product is now a public company, and both Walgren and Devaney see the issuer universe broadening considerably. Larger private companies are increasingly using the structure to deleverage corporate balance sheets, replacing higher-cost on-balance-sheet debt with non-recourse securitisation proceeds.
Geographic and sectoral expansion are also on the horizon. Midstream assets, with their fixed-price shipping agreements already providing much of the cash flow predictability that upstream assets achieve through hedging, are a natural adjacent application. International transactions in stable, low-political-risk jurisdictions represent another frontier, though the larger well sizes offshore will require structural adaptation.
“The use case is broad,” said Walgren. “We could easily see this expanding to the scale of what we’re doing in data centres or fibre.” Devaney was equally direct about the trajectory: “As the market continues to evolve, as more issuers and investors become familiar with the product, we expect expansion across almost every aspect of capital markets within the upstream and broader energy space.”
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What began as an esoteric instrument for a handful of specialist investors has matured into a product reshaping how energy assets are financed, acquired, and valued. For buyers, sellers, and long-term asset owners across the upstream and midstream sectors, PDP securitization is becoming a tool that is increasingly difficult to ignore.
For more insights from Peter Walgren, Niall Devaney, and Jefferies, the leading advisor on M&A transactions in the energy sector, visit the firm’s dedicated thought leadership site.
