Trends Watch: Private Equity Investing in Oil & Gas

Private equity firms have expressed keen interest in investing in the oil and gas industry primarily because it offers potential for higher returns, amid market volatility and increased demand for energy. However, there are also considerations that need to be taken into account by investors.

At EisnerAmper, we regularly engage with industry leaders and experts to bring our clients critical perspectives on navigating complex investment landscapes.  

In a recent podcast with John Kiser, President, Five States Energy, a Dallas-based closed-end fund that invests in small, undervalued oil and natural gas properties in the US, discussed the various opportunities and challenges the space presents.  

Opportunities in the Midstream Sector and Natural Gas Demand

Some of the most significant opportunities lie in the midstream sector of the oil and gas industry. Two primary drivers are fueling the increased demand for natural gas infrastructure: 

Data Center Expansion  

Data centers and the power plants that support them are mostly gas-fired. This creates a substantial need for new and expanded pipeline projects to deliver natural gas efficiently to these energy-intensive facilities.  

To capitalize on these opportunities, investors should prioritize thorough financial and operational due diligence to assess the viability of potential infrastructure investments in this rapidly expanding sector.  

Export Growth in Liquefied Natural Gas (LNG)  

The LNG industry is experiencing rapid expansion, particularly along the US Gulf Coast. With numerous terminals already in operation and significant anticipated growth in export capacity over the next few years, there’s an enormous and urgent need to transport natural gas from production sites to these export terminals.  

Challenges: Social Headwinds and Regulatory Uncertainty  

Despite the opportunities, there are a couple of challenges when investing in the sector.  

Social Headwinds and Workforce Development 

The industry faces “social headwinds” as it navigates perceptions regarding its environmental impact and contribution to climate change. This scrutiny, despite oil and gas being undeniably integral to modern life, has contributed to a decline in students pursuing relevant fields like geology and petroleum engineering, potentially leading to future workforce shortages.  

To help mitigate these risks, investors can focus on ESG integration, developing robust frameworks that address stakeholder concerns and align investments with long-term sustainability and responsible practices. 

Tariff Uncertainty  

The uncertainty surrounding tariffs is another obstacle that the space presents. Such uncertainty often causes companies to withdraw, refrain from spending a lot of capital, and avoid taking the risks associated with it. This cautious approach can lead to reduced investment in exploration and development, compelling companies to prioritize cost control over growth. 

Investors seeking to mitigate the risks associated with evolving trade policies and geopolitical shifts should leverage regulatory insights and economic modeling to inform more resilient portfolio planning. 

The Long-Term Potential of Oil & Gas Investments  

Ultimately, oil and gas play a prominent role in our everyday lives. Crude oil, the raw material, undergoes refining processes to yield a vast array of essential products: 

• Fuels: Gasoline, diesel, and aviation fuel power our transportation systems. 
• Specialty Products: Crude oil derivatives are found in critical medical and food-grade products. 
• Consumer Goods: Methanol, derived from crude oil, is a key ingredient in cosmetics, lotions, and numerous other consumer goods, demonstrating the industry's broad impact beyond just energy. 

For private equity firms, success in this industry demands more than just recognizing its potential; it requires a deep, informed understanding of its unique opportunities and inherent challenges. By prioritizing comprehensive analysis and strategic foresight, investors can confidently navigate the complexities and drive significant value in this evolving sector. 

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