Many things have changed since the shale boom first took off several years ago in the U.S. But the basic rules still apply: in order for energy production to be viable, you need to have a robust support system in place for transporting and storing the oil and gas that is being produced. That’s where midstream energy opportunities come into play – and worth investors’ consideration in the current environment.
Midstream energy can be thought of as the glue that holds the process of oil and gas production together. When you think of this process, what comes to mind? Perhaps oil wells across West Texas or in the Gulf of Mexico, where drilling takes place, or gas stations and pumps where the finished product is consumed. But in the middle of all of this are the processing plants that help create the finished product, storage facilities to hold this commodity, as well as the railcars and pipeline networks that transport oil and gas to their final destinations. This vital step requires significant infrastructure investments in order to ensure that oil and gas can be distributed efficiently to satisfy consumer demand.
The past decade has seen an unprecedented level of growth in the U.S. energy business, driven in large part by the expansion of oil and gas production through hydraulic fracturing (or “fracking”) and horizontal drilling. Reserves continued to increase from 2010 to 2014, and while they decreased somewhat from 2014 to 2015, they still remain elevated when compared to preceding years, as shown below.
U.S. Shale Proved Reserves (Billion Cubic Feet)
Source: U.S. Energy Information Administration, December 14, 2016.
Interestingly, in certain areas where oil and gas production has expanded rapidly, there hasn’t been an equal increase in the development of midstream energy infrastructure needed to process and transport this supply. This imbalance creates a number of long-term investment opportunities, many of them within the private equity space.
For some investors, investing in U.S. energy and infrastructure might seem counterintuitive considering that oil prices are not what they once were. They may wonder if the chance has already passed, and whether it would have been better instead to put private capital to work a few years ago when the price of oil was at record highs.
We disagree with this assessment; in our view, the midstream space continues to present interesting investment opportunities given the current market dynamics. For example, the lower oil price environment witnessed since early 2015 has spurred an important dividing line among skilled producers and those who were simply riding the prior oil price boom. When times get tougher, you are able to see which operators – and which basins – have what it takes to succeed in a variety of different economic and market environments.
Where you might not have seen much interest in these investments 15 years ago, today there are a number of specialized private equity managers who are now involved in this space. For these investors, there is the chance to benefit from a macroeconomic shift by partnering with operators that possess a high degree of expertise in the midstream energy sector. The best types of investments are with skilled operators who are able to identify attractive investment opportunities even in a low-price environment. Having this type of acumen can be a good safeguard during periods of market volatility and heightened risk.
Investments in midstream energy aren’t always the easiest to identify at the outset. It takes an experienced real assets manager to locate these operators and decide which ones have the best chance of generating solid value over the long term. However, for investors that have the patience and the capital to pursue these types of opportunities, it can translate into attractive risk-adjusted returns for their portfolios.
The investments discussed herein may not be available or suitable for all investors unless the investor meets certain regulatory eligibility requirements. Among the risks presented by real asset investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and/or governance, investment risks, leverage and tax considerations. These investments can also be affected by environmental conditions / events, political and economic developments, taxes and other government regulations.