Supported by positive distribution trends and M&A activity, 2023 has been an exciting year for the midstream space. VettaFi’s head of energy research Stacey Morris recently sat down with VettaFi writer Elle Caruso to discuss the outlook for midstream, 2024 guidance, and overlooked investment opportunities in the space.
Caruso: Let’s start by highlighting key events of the past year.
Morris: I think one of the key themes from this year has just been midstream’s strength year to date despite oil prices being down over 13% year to date through December 6 and the weakness that we’ve seen in U.S. natural gas prices.
MLPs are outpacing the S&P 500, with the Alerian MLP Infrastructure Index (AMZI) up 24% on a total return basis through December 6. [The Alerian MLP ETF (AMLP) tracks the AMZI.] The broader Alerian Midstream Energy Select Index (AMEI), which underpins the Alerian Energy Infrastructure ETF (ENFR), is up over 14%. That contrasts with broader energy down almost 4% on a total return basis this year. I think what we’ve really seen over the last month or so, but even all year, is just midstream’s defensiveness on display. I think that’s been a key theme for this year.
I would also be remiss if I didn’t talk about M&A activity in this space. Most notably Magellan’s buyout by ONEOK (OKE) at a 22% premium. That has also contributed to some of the strength that we’ve seen in MLP performance. Not just because Magellan (MMP) had a nice jump before it was ultimately purchased, but also because you saw some MLPs trade up in sympathy with that.
Caruso: That’s a great summary of key themes in 2023. Looking ahead, what is your outlook for oil and natural gas this winter and through 2024?
Morris: I think on the oil side, the picture is murky. I think OPEC+ can defend a floor. Since the meeting at the end of November, Russia, and Saudi Arabia have said they’re willing to make additional cuts if needed. But I think it’s harder to identify upside drivers for oil in 2024, short of a really strong economic environment and strong demand environment because you also have incremental supply coming from places like the U.S. and Guyana.
For natural gas, I think we could see some improvement this winter more short term if we get colder weather. But generally, the outlook for U.S. natural gas prices gets better as we get into 2024 and 2025 when you start to have some more meaningful LNG export capacity come online in the U.S.
To sum that up, I think the oil picture is pretty murky. Natural gas probably gets more constructive as the year goes on.
Caruso: What are you looking forward to in 2024?
Morris: I think for midstream the thing that’s maybe most important or what I’m most excited about is just continued execution. It’s a pretty simple playbook: generate free cash flow and return that to investors through dividends and buybacks.
I hope we see more companies announce long-term capital allocation plans or frameworks. I think that kind of visibility has been really helpful for the companies that have done that, so I hope that gains more traction.
I’m hopeful that midstream will gain more attention in the investor community next year and that people will start to realize the positive track record that the space has been building over the last several years.
Also, we’re continuing to look for M&A. Whether that’s at the asset level, which we’ve seen more of lately, or the corporate level. But I think those are some of the things to watch for in 2024.
Caruso: What’s your take on what we’ve seen so far in terms of midstream companies offering guidance for 2024?
Morris: I think generally guidance so far for 2024 has been good. We’ve seen a handful of names give guidance just in the last week or so. Generally, we’re seeing companies shake out at around 5% EBITDA growth for next year. Some are higher, some are lower.
One of the advantages of midstream is that we actually get full-year guidance for financials this early in the year, whereas producers or other energy subsectors, like refiners, can’t give you that kind of guidance because it all really depends on commodity prices. So I think another important point to highlight is just the advantage of being able to get a look at 2024, as we’re sitting here in early December 2023, with pretty hard and fast numbers of what companies are expecting from an EBITDA perspective.
Caruso: What are some investment opportunities or areas you think are currently being overlooked or misunderstood?
Morris: Unfortunately, I feel like this space broadly is overlooked. I think people may be fixated more on the challenges that broader energy has had this year and so maybe they’re not picking up on some of the strength that we’ve seen in the midstream and MLP space and those gains that we’ve seen. So, unfortunately, broadly, the space gets overlooked.
People may not appreciate performance; they may not appreciate that the yields in the space are still very much attractive. AMZI was yielding 7.7% as of December 6. AMEI was at 6.1%.
We see a lot of positive execution in the space and positive performance. Flows have been okay, but I don’t I don’t know if people are fully appreciating how well midstream, and particularly MLPs have done this year.
Caruso: You’ve answered all my questions. Is there anything that I didn’t ask you that I should be asking?
Morris: I think one of the things we didn’t talk about was just the outlook for dividend growth, which I think remains really strong in the midstream space. We already have companies providing guidance for dividend growth next year.
Plains All American (PAA) talked about 19% distribution growth. Targa Resources (TRGP) has talked about a 50% increase to its dividend. So that’s one thing I would also just want to highlight because dividends are such an important part of this space, and I think the trends there are going to stay very strong, regardless of what we see from the commodity price environment.
Disclosure: © VettaFi LLC 2023. All rights reserved. This material has been prepared and/or issued by VettaFi LLC (“VettaFi”) and/or one of its consultants or affiliates. It is provided as general information only and should not be taken as investment advice. Employees of VettaFi are prohibited from owning individual MLPs. For more information on VettaFi, visit VettaFi
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