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Christopher S.C. Heasley, David M. Castro, Jr., Lucas Spivey, Anthony H. Speier III, Midstream Oil & Gas from the Upstream Perspective

Private equity has played an ever-increasing role in capitalizing upstream exploration and production (“E&P”) companies since the beginning of the oil price downturn in 2014. Upstream E&P is a capital intensive enterprise with spending exceeding $340 billion in 2017 alone. Cumulative capital expenditures on unconventional resources is expected to exceed $5.1 trillion by 2035 (averaging $200 billion per year). Since the downturn, capital in the oil and gas sector has remained tight, with traditional financing sources (i.e., capital markets providing both debt and equity funding and banks providing secured and unsecured loans) either inaccessible to many industry players or on such restrictive terms that companies have systematically sought out alternative funding sources. Private equity firms have reportedly raised more than $100 billion since 2014 for investment in the oil and gas space to fill this funding void, with the bulk of the money targeted to the upstream sector. With their “dry powder” adding up, it seems likely that private equity firms will look for larger and more complex transactions in the coming years. And as the upstream acquisitions become more complex, many of these transactions will include a midstream component through the inclusion of gathering and transportation pipelines (and related infrastructure) in the conveyed “Assets” and/or by the upstream “Assets” being transferred subject to existing midstream arrangements, including acreage dedications to third party gathering systems and/or downstream transportation lines. While many private equity firms have a strong bench of upstream expertise, education will likely be required on certain issues common to the midstream space.