During a recent webcast, VettaFi’s head of energy research Stacey Morris addressed advisors’ questions about the midstream energy subsector. This article covers questions that were discussed as well as questions that were submitted but not able to be answered during the midstream-focused webcast.
How much does a strained relationship with China impact energy, specifically midstream?
From an energy perspective, while the trade dispute with China initially impacted oil prices and raised concerns about oil demand (mirrored across tariff discussions), the direct effect on midstream has been limited. Liquefied natural gas (LNG) exports to China have been rerouted, and natural gas liquids have either been exempted or were also rerouted. This market efficiency means China can source NGLs elsewhere, and the U.S. can sell to other markets. Consequently, the overall direct impact of the trade dispute to the midstream sector has been minimal.
How could the potential return of Russian gas impact midstream ETFs?
The EU has talked about phasing out Russian energy imports by the end of 2027. It is difficult to envision Russian gas flowing like it had before 2022.
That said, presumably the main area of concern would be U.S. LNG exports. However, customers of those facilities typically sign 20-year purchase agreements for LNG. Customers commit to the volumes and agree to pay liquefaction fees, so they can’t just switch from US LNG to Russian natural gas if the geopolitical situation changes.
Considering the expected increase in domestic oil and gas volumes...
how will this affect your capital expenditure projections for midstream infrastructure firms and could it lead to reduced payouts?
Most midstream companies aim for mid-single-digit dividend growth, which generally aligns with their projected EBITDA growth. While some companies have increased capital spending since 2020, primarily due to natural gas projects rather than oil production, they are still generating free cash flow. This is partly due to previously high capex levels and projects completed before the pandemic. Despite some increases in capital expenditure, free cash flow generation is expected to continue, supporting the anticipated dividend growth.
What is the typical contract duration?
Do these companies generally have staggered maturity dates, or is there a pattern to their renewal periods?
Pipeline contracts typically range from five to ten years for oil and around twenty years for natural gas, especially for new pipelines supporting LNG facilities or power plants. Storage contracts tend to be shorter, around three years. Midstream companies need to be confident in expected returns before investing in expansions or new builds, and that requires long-term customer commitments. Contract maturities are usually staggered, even within the same asset, to avoid simultaneous renewals.
Investing in midstream through a diversified product can help mitigate recontracting risk. By having exposure to multiple midstream names, investors are less likely to be overexposed to production trends in a single U.S. region or the recontracting process of a specific pipeline.
For more on midstream, watch the replay of our 30-minute webcast, “The State of Midstream/MLPs in Volatile Markets.” Register here.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
