The oil and gas industry is massive and to keep it organized, we break it into three major sectors: upstream, midstream, and downstream.
Upstream – This is the exploration and production stage. It's all about finding hydrocarbons like oil and gas, drilling wells, and getting hydrocarbons out of the ground.
Midstream – This is the transportation and storage stage. Think pipelines, rail, and storage facilities — everything that moves oil from the wellhead to the refinery.
Downstream – This is the refining and distribution stage. It's where crude becomes gasoline, jet fuel, and the products needed to make things like plastics and rubber — that eventually ends up in your car, home, or business.
So upstream drills it, midstream moves it, and downstream transforms it.
Each segment has a different risk-reward profile and cash flow behavior. Let's dive a little deeper into it.
Upstream: Since we are actually exploring and drilling for oil, it carries more operational and commodity price risk than other segments. You're dealing with geology, decline curves, and the realities of the field. But here's the tradeoff: monthly cash flow, significant tax deductions (which is why working interests are sought out by high income earners), and a direct stake in real production. Upstream is the only part of the chain that directly participates in commodity upside. When oil prices rise, so do the checks. Investors here also capture powerful tax advantages — deductions for drilling costs and ongoing depletion allowances that no other sector can touch. And perhaps most importantly, upstream ownership gives you a direct economic interest in real production. You're not betting on a stock price, you're participating in a barrel.
Midstream is more stable. Midstream companies typically operate under long-term, fee-based contracts, which smooth out cash flow and reduce sensitivity to oil price volatility. For investors, midstream behaves a lot like a triple-net lease in commercial real estate — steady rent checks, lower risk, and yield that's driven more by volume than by commodity price. It's not flashy, but it's durable. If you're seeking stability and predictable yield, midstream is the toll road of energy.
Downstream, where the raw product becomes refined value. This includes refining, petrochemical processing, and retail distribution — the world of companies like Valero, Marathon, and Exxon's refining divisions. Downstream margins depend heavily on refining spreads — the difference between crude input costs and finished product prices. When that spread widens, refiners make money; when it tightens, margins vanish. It's also tied closely to economic cycles — fuel demand rises and falls with consumer behavior, travel, and industrial output. Downstream can deliver strong profits during demand booms, but it's the most exposed to macro volatility and least insulated by contractual cash flow.
Here's a quick analogy: Imagine a steak dinner and think of oil and gas like the beef business.
Upstream is raising and harvesting the cow — that's exploration and production.
Midstream is trucking the beef from the ranch to the butcher — this is pipelines and infrastructure.
Downstream is the butcher and steakhouse — refining and selling the final product.
We don't run the steakhouse. We're not hauling trucks. We own a working interest in the herd — and at Iron Horse, we get paid every month when that beef hits the market.
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KEYWORDS: upstream oil and gas, midstream energy, downstream refining, working interests, tax deductions, monthly cash flow, exploration and production, energy investing, oil and gas sectors, Iron Horse Energy Fund, Wellhead Wednesday
© 2025 Iron Horse Energy Fund
Nov 14 20253 min