The volume and number of private equity deals in the energy sector has risen steadily since 2008 and will continue to expand in the next three to five years, according to a recent study from PwC.

During the last 10 years, private equity has made a series of investments across the entire chain of the industry, including midstream, oilfield services, downstream and upstream. Since 2008, the number of private equity deals has risen from 11 in 2008 to about 35 in 2012. The value of those deals has also increased from less than $5 billion in 2008 to more than $32 billion in 2012.

The number and amount of private equity deals will continue to expand for the foreseeable future because of a series of factors. For one, the ongoing allure of the shale industry is expected to continue to attract private equity investors. “The shale revolution is projected to require more than $5 trillion in investment over the next 20 years in the U.S. alone, largely directed to the upstream and midstream sectors,” the report states.

“Over the next three to five years, we expect private activity to continue to increase. We expect ongoing major presence in the midstream and upstream sectors as they look to expand their footprint in the U.S. shale resource landscape,” the report states. “Energy targeted funds have experienced record inflows recently and this capital will be deployed to various opportunities across the risk continuum.”

PwC thinks the energy sector offers private equity a variety of risk levels suitable to a diverse range of investors. The midstream sector has the lowest risk profile, followed by oilfield services, downstream and, finally the upstream, which has the highest risk profile.

“The resulting capital requirements offer investing opportunities for every risk appetite within the energy sector: from start-ups and companies needing growth capital to mature asset ownership,” the report states. In addition to a range of investment opportunities fitting every risk profile, the sector also offers a range of exit strategies: initial public offerings (IPOs) and master limited partnerships (MLPs), which make the energy sector attractive to private equity investors.
The ongoing development of technology in the energy sector also draws private equity. “Innovation continues to spur growth and opportunities within oilfield services, where entrepreneurs and investors are leveraging the industry’s low barriers to entry, as well as the follow-on effect for exploration and production companies,” the study states.

The fee-based structure of most midstream companies means this sector is the most attractive to risk-averse private equity investors. Private equity has traditionally favored non-FERC regulated intrastate lines, but lately there has been some movement toward interstate pipelines, the study noted. “These pipeline assets are often distressed and provide opportunities for private capital to play the cycle, restructure the assets, and not suffer pressures to maintain distributable cash flows.”

Upstream investments are the most risky for private equity investors, in part because they are tied to fluctuations in commodity prices. The ability to hedge commodity risk is important to potential private equity investors, who are drawn to both international deepwater exploration opportunities and to U.S. onshore shale plays, which have minimal exploration risk. In some cases, private equity investors are drawn to the upstream sector because they think commodity prices are staged for a rebound.