Midstream/MLP Free Cash Flow Yields Still Strong

by Kyle Richards of VettaFi, 9/27/25

Summary

  • The substantial and steady free cash flow (FCF) generated by midstream MLPs and C-Corps sets them apart from the broader energy sector and other equities.
  • Midstream is expected to continue generating FCF, even as some companies have growing project backlogs related to natural gas opportunities.
  • Energy infrastructure companies are using excess cash to reward investors with dividend growth and strategic buybacks.

For years, midstream companies have generated significant free cash flow (FCF), which has differentiated them from the broader market. With balance sheets in good shape, excess cash has been used to reward shareholders with dividend growth and opportunistic equity repurchases. Even with some capex creep related to a robust outlook for natural gas demand, midstream is expected to continue enjoying free cash flow tailwinds.

Midstream Stands Out for Strong FCF Generation

In contrast to the high-growth era of 2010–2020, when U.S. oil production more than doubled, midstream capital spending has generally moderated. This aligns with more measured oil and gas production growth in the U.S. For years, broader energy has been focused on capital discipline, free cash flow generation, and returns to shareholders. As of September 17, energy had the highest trailing 12-month FCF yield of any sector in the S&P 500 per Bloomberg.

For many energy companies, FCF generation will fluctuate somewhat with commodity prices. Higher oil and gas prices would lead to more excess cash. However, midstream’s FCF generation tends to be more sustainable and predictable. This is due to midstream’s fee-based business model backed by long-term contracts, which results in more stable cash flows. This is also why midstream companies can give year-ahead EBITDA guidance or multi-year expectations for EBITDA growth, in contrast to the rest of energy.

As shown below, midstream/MLPs have even higher trailing FCF yields than broader energy, represented by the Energy Select Sector Index (IXE). MLPs are represented by the Alerian MLP Infrastructure Index (AMZI). Midstream is represented by the Alerian Midstream Energy Select Index (AMEI), which is ~75% U.S. and Canadian midstream corporations and ~25% MLPs. From a valuation standpoint, higher FCF yields for midstream/MLPs also can serve as an indication that this space has not become expensive on a relative basis.

Free Cash Flow Yields

Midstream MLPs and corporations have used excess cash to grow their dividends. Dividends are also generous relative to the broader market and IXE. As of September 17, AMZI and AMEI were yielding 7.6% and 5.4%, respectively. While midstream companies tend to prioritize dividend growth, companies have also deployed buybacks as a tool for returning excess cash to investors.