In January, a financial firm pronounced equity “well and truly out of love” with the oil sector.

Not quite. Since then, money has poured into E&Ps through equity raises and banks and has become the Swiss Army knife of the industry: financial lifeline, debt consolidation tool, cash for potential acquisitions—and a hindrance for some deals.

Richard Kinder, Kinder Morgan Inc. (NYSE: KMI) chairman and CEO, said during an earnings call April 15 that his company will remain active in acquisitions in the coming months.

Kinder noted that the company closed a $3.1 billion acquisition of Hiland Partners on Feb. 13.

“We’ve not been sitting on the sidelines,” Kinder said.

But Kinder acknowledged that $8 billion in financing E&P raised since the beginning of 2015 is making deals more challenging.

“There’s a lot of cheap money out there chasing deals right now,” Kinder said. “That’s pretty common knowledge how much money has been injected into the energy patch in the past few weeks.”

Tudor, Pickering and Holt said Kinder’s comments confirm that a recent wave of E&P equity issuances has taken pressure off of upstream operators to divest their midstream assets.

E&Ps have come to the equity market and to a lesser extent the debt market at an unprecedented rate, Daniel P. Katzenberg, analyst, Baird Equity Research, wrote in an April 10 report. Some companies have shored up liquidity and balance sheets ahead of a potentially prolonged retrenchment in hydrocarbon pricing, Katzenberg said. Along with equity, debt issuances have tallied about $5.9 billion.

Deals remain in focus for lenders and operators.

“In early 2015, the focus was which E&Ps would go out of business,” Katzenberg said. “However, similar to past cycles, financial markets and partner banks have willingly bailed out E&Ps in a flurry of deal activity. Given the emphasis on balance sheets of late, recent equity deals have been given a pass, despite the significant dilution.”

Katzenberg said that Royal Dutch Shell Plc's (NYSE: RDS.A) deal to buy BG Group for $70 billion has “rekindled M&A animal spirits.”

“U.S. energy investors' hopes for consolidation in the energy sector have been set alight,” he said, especially in light of billions in financing.

The financing window remains open and more deals are likely from highly levered and opportunistic producers, though the pace should slow after the “the deluge” in the first quarter of 2015, he said.

David Tameron, senior analyst, Wells Fargo, said the bid-ask spread remains too wide and, by and large, mid- and small-cap producers have to endure more pain before they would look to sell.

“However, based on client conversations, the Royal Dutch Shell-BG transaction has changed some perception, with Anadarko Petroleum (NYSE: APC) being brought up frequently,” Tameron said. “More than just a few believe that is real.”

Money Up, Down

The increase in capital is a mirror image of the oil and gas sectors’ ability to find money when oil prices were riding high.

Oil and gas globally became a magnet for new capital from 2009-13, raising about $850 billion and accounting for 27% of all new capi­tal at that time, said John England, vice chairman and U.S. Oil & Gas leader for Deloitte LLP in an April report.

The massive influx of capital, supported by high oil prices, transformed the O&G sector at its core, making it one of the fastest-growing sectors across all industries.

“The O&G sector has not only distinguished itself in raising capital but also in how it has deployed the money raised,” England said.

While other industries earmarked much of its capital outflows for share buybacks, dividends, conversion of liabilities and debt retirement, oil and gas increased its capital spending significantly. Spending rose by 50% during the past five years to $890 billion.

However, E&P companies worldwide actively outspent its operating cash flow by about $150 billion, England said.

Now, since oil prices have degraded, U.S. E&Ps, which have been the principal spend­ers, have lost more than $550 billion in market capitalization.

Oil and gas companies are now adjusting to a new reality.

“Navigating this new environment might be painful for many O&G companies, but they understand from past experience that adapting will only make them more efficient, dynamic, and innovative,” England said.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.