Midstream ETFs have generated strong returns for investors yet remain an attractive investment opportunity as valuations in the space have not become overextended.
For investors looking at the midstream space and wondering if there’s room for the space to run, valuations suggest midstream ETFs still have compelling upside potential. Midstream ETFs are priced competitively based on forward EV/EBITDA multiples, even trading at discounts to their three- and 10-year averages.
The index underpinning the Alerian MLP ETF (AMLP ), the Alerian MLP Infrastructure Index (AMZI), is trading at multiples that are at a discount to both the three-year and the 10-year average. AMZI is trading at a forward EV/EBITDA multiple of 8.4x as of August 9. Meanwhile, its three-year average is 8.8x and 10-year average is 10.1×.
For the Alerian Energy Infrastructure ETF’s (ENFR ) underlying index, the Alerian Midstream Energy Select Index (AMEI), multiples are in line with the three-year average, but still at a decent discount relative to the 10-year average. AMEI is trading at a forward EV/EBITDA multiple of 9.7x as of August 9. The index’s three-year average is 9.6x and 10-year average is 11.2×.
Despite strong performance in recent years, it hasn’t kept pace with EBITDA revisions in the space, according to VettaFi head of energy research Stacey Morris. Notably, a number of companies raised 2024 financial guidance this month with earnings results.
Free Cash Flow and Valuations
Free cash flow yields from key MLPs and C-corps within the broader energy infrastructure category remain extremely robust. These companies are generating strong free cash flows on the back of the fundamental improvement seen in the past half decade. However, the market hasn’t rewarded these names with multiple expansion.
Strong free cash flow generation is fueling deleveraging, buybacks, and distribution growth. From a valuations perspective, midstream companies haven’t been re-rated, despite consistent operational performance in recent years.
Midstream companies began the process of really unwinding major capex budgets at the end of the 2010s. They had spent, borrowed, and invested a lot of money to build new pipelines and other infrastructure. These companies reached the end of those big budgetary commitments around 2020. In turn, they started generating meaningful free cash flow. This was due to cash flows from newly completed projects and the decline in growth capital spending.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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