Subsector motivations

We explore the industry subsectors — upstream, midstream, downstream and oilfield services — in which PE will be most involved over the next two years.

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PE firms are set to become more involved in the midstream and upstream segments in the next two years, according to our survey. An equal share (44%) of respondents see the two sectors as their best opportunity for return on investment.


The high-risk upstream sector lures investors with lowered valuations and the possibility of high returns. PE firms can reduce technical and exploration risk by investing in mature basins, where operational and cost efficiencies can increase profit margins and forward hedging can effectively lock in some stability.

With upstream debt-to-equity ratios currently highly leveraged, buying into upstream company debt is also an option for PE to enter the sector. And, indeed, 39% say they are attracted to the upstream segment, expecting favorable valuations. Depending on the acquisition structure and the investment types that the PE firm will ultimately hold, significant tax considerations may exist with respect to the investments.

"The upstream segment provides the greatest investment opportunities. We always look at the analysis of well economics, including long-run sub-play production analysis, decline curves and then resource consistency and regulatory factors."

Managing partner, US PE firm


Midstream transactions have been a dominant force in oil and gas dealmaking over the past few years, especially the consolidation of pipelines in the US and Canada. The consistency and predictability of returns has been the greatest driver for respondents to get involved in the transport and storage segment.

In the current environment, some midstream assets are still doing well with fee-based, longterm contracts. Valuations in this segment have been steady and midstream assets, especially those held by upstream entities, may be put on the markets by those looking to raise money to help through the cash crunch.


Only 2% of respondents name the downstream segment as their top choice for investment. High costs associated with modernizing and maintaining existing refineries may deter PE firms from investing in this segment. Product price volatility also makes returns uncertain but the risk is more manageable.

Key challenges for PE firms investing in refining assets would be the very specialized operational and management talent needed to successfully manage such investments.

Refining may be the new midstream when it comes to asset risk in oil and gas — margins can be hedged. Small regional refineries, especially close to crude sources and that supply local markets, especially in North America, can lock in profits by hedging the cost of crude and the sale of refined products. In combination with midstream assets, investors may yet consider refinery assets as strategic plays.

Oilfield services

Oilfield services can benefit from PE firms’ networks, management expertise and capital for technology acquisition that can bring cost efficiencies. But, only 10% of PE respondents find oilfield services an attractive play.