Midstream energy infrastructure has demonstrated notable defensiveness during a period of heightened macro volatility. This resilience is supported by durable cash flow characteristics that distinguish the segment from the broader energy sector.
Key Takeaways
- Midstream energy infrastructure outperformed broader energy in Q2, with midstream and MLPs gaining 1% while crude oil plunged over 30%.
- The Alerian Midstream Energy Select Index (AMEI) yields 4.5% and the Alerian MLP Infrastructure Index (AMZI) yields 6.4%, underpinned by consistent EBITDA growth and payout stability.
- Midstream operators protect investors against inflation through annual PPI-linked FERC adjustments and take-or-pay pipeline contracts.
The midstream segment showed particular defensiveness during the second quarter, as oil prices dropped significantly amid ceasefire negotiations in the Middle East conflict. Broad midstream and MLPs each gained roughly 1%, while broader energy fell double digits and oil plunged over 30%. This resilience can be attributed to fee-based, long-term business models that provide visibility into future revenues and insulation from commodity price swings, Kyle Richards, energy research analyst at VettaFi, said during a recent webcast.
Income Potential & Yields in Midstream Energy MLPs
For investors seeking income, MLPs may be particularly appealing, given attractive yields backed by solid trends for distribution growth. The Alerian MLP Infrastructure Index (AMZI) is yielding 6.4%, and the Alerian Midstream Energy Select Index (AMEI), which is ~75% midstream corporations and ~25% MLPs, is yielding 4.5% as of September 2, outperforming many other income assets including REITs and utilities.
Investors can access AMZI via the Alerian MLP ETF (AMLP ), and AMEI with the Alerian Energy Infrastructure ETF (ENFR ).
See more: Midstream ETFs AMLP and ENFR Announce Q3 Distributions
Free Cash Flow Acceleration & Capital Discipline in Midstream Energy Infrastructure
These yields are not simply a function of price decline but are fundamentally supported by companies’ consistent ability to grow EBITDA and maintain stable fee-based operations, Richards said. Roughly 90% of both AMLP and ENFR holdings have grown their payouts. Furthermore, companies have avoided meaningful dividend cuts since the COVID disruptions in 2021.
Free cash flow generation has accelerated meaningfully since COVID, driven by decreased capital expenditure budgets and greater capital discipline. Since 2023, AMLP holdings have repurchased over $2.5 billion in equity, while ENFR holdings have repurchased nearly $13.5 billion. This reflects a fundamental shift from debt and equity issuance toward shareholder returns, Richards said. Furthermore, leverage ratios have also declined across the space.
Inflation Protection via Take-or-Pay Pipeline Contracts
The cash flow story is further reinforced by inflation-linked contracts. Pipeline tariffs, particularly under FERC jurisdiction for liquids pipelines, are adjusted annually based on the Producer Price Index.
Beyond FERC-regulated pipelines, most midstream companies include inflation escalators in their long-term take-or-pay contracts. Richards cited Enterprise Products Partners (EPD) as an example of one MLP that has over 90% of its contracts structured this way. Take-or-pay contracts guarantee payment even if a customer is not actively shipping product. MLPs and midstream have outperformed the S&P 500 in seven of nine years when inflation exceeded 3% since 2000.
Additionally, increased export demand for natural gas liquids (NGLs) and liquefied natural gas (LNG), partly driven by Middle East supply disruptions, has provided incremental revenue tailwinds for midstream operators. These structural demand shifts further underpin the sector’s cash flow visibility going forward.
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vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP, and ENFR for which it receives an index licensing fee. However, AMLP, and ENFR is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, and ENFR.
