Attracted by upside potential, myriad opportunities and sufficient funding, investors have poured into the upstream sector over the last decade, spending nearly $245 billion on exploration and production (E&P) transactions, according to a new study from analytics firm IHS Markit.

Last year was the slowest in eight years for deal making across all segments of the U.S. natural gas and oil patch, with lukewarm sales activity continuing through the first half of this year (see Daily GPI, April 21). Despite the downward trend at home and also in global upstream mergers and acquisitions (M&A), IHS, like other firms, expects that activity to accelerate. From 2006-2015, investors participated in energy transactions across the spectrum, IHS said, including asset and corporate M&A; private equity funding, loans and investments in private E&P companies.

“Financial investors have significantly expanded their investments in the upstream E&P sector because they have numerous opportunities to invest, plenty of available capital and they are keen to take advantage of the opportunistic acquisitions that arise during oil market downturns,” said Cindy Giglio, a senior financial analyst and author of the IHS report. She added that the firm expects the trend to continue because investors “can afford to go bargain hunting,” for deals that would have significant upside if oil prices rebound.

“They also see the sector as a very attractive outlet for longer-term investments,” she said. “They can better afford to sit on those investments and wait for greater returns.”

The study identifies commodity trading firms; conglomerates; financial service firms; government entities; hedge funds; investment firms; pensions plans, and private equity firms as investors. It said they currently account for more than one-third of global upstream activity value.

During the last decade, the S&P Energy Sector Index has underperformed all of the S&P sector indices except for financials. Worldwide, IHS said, energy equities have also underperformed. But the study said they are valued more attractively compared to other equity investments.

“…They have had difficulty finding other attractive equity investments outside the sector that are fairly valued with compelling upside potential in the current environment of low interest rates,” Giglio said of investors and growing opportunities in the E&P sector.

As prices collapsed, low cash flow, increasing debt and pending maturities with the threat of default chased off investors. With some producers cut off from equity access and debt financing markets, many analysts have expected private equity and mezzanine lenders to fill the capital vacuum.

IHS said one of the key drivers of additional investment would be private equity firms that have been bolstered by increased allocations from pension funds and longer-term institutional investors. The study found that $165 billion in upstream asset opportunities are currently available for the taking, which could “continue to drive financial investors to favor the sector.” About 45% of those opportunities are located in the United States in unconventional assets such as tight oil and gas and shale oil and gas. The rest, the study said, are located in Africa, the Middle East, Canada and the Far East.

Giglio said the opportunities are understated because the study did not include rumored sales or divestitures by large integrated oil companies that total more than $75 billion. The report also said an abundance of money is available to fund growing energy investment opportunities.

“In the quest for higher returns and greater diversification of risks, target allocations for alternative investments have been increasing to 35% or more of these investors’ portfolios,” Giglio said. “Those alternatives include hedge funds, private equity, real estate, direct oil and gas investments, timber and more.”

Industry estimates of available private equity capital reserved specifically for energy industry investments range from $100 billion to $150 billion, according to the study.