Summary
- A combination of factors has contributed to a downward trend in midstream leverage ratios over the last several years.
- Large midstream MLPs and corporations generally have leverage ratios in line with their stated targets, which tend to fall between 3x and 4×.
- Improved leverage metrics arguably ease the path for companies to pursue shareholder returns, such as dividend growth and buybacks. Stronger balance sheets can also prove beneficial in an uncertain macro environment.
Investors often ask about midstream/MLP leverage ratios as a gauge of overall financial health. A combination of factors have contributed to a downward trend in midstream leverage ratios over the last several years, including debt reduction fueled by excess cash flows and ongoing EBITDA growth. This note looks at 2024 leverage ratios for some of the larger names in the midstream space, credit ratings, and why leverage matters.
Midstream’s Current Leverage Ratios Are in Line With Targets
A decade ago, it was fairly common for midstream companies to have leverage ratios (defined as net debt / adjusted EBITDA) around 5×. Today, most midstream names have target leverage ratios between 3x and 4x (read more.).
The chart below shows 2024 leverage ratios for select names in the Alerian Midstream Energy Select Index (AMEI), while the MLPs shown are the top six names in the Alerian MLP Infrastructure Index (AMZI) by weighting. Data largely reflects companies’ stated leverage, which could have some variations in the calculations. The metric is pro forma for acquisitions in the case of Energy Transfer (ET) and ONEOK (OKE). The average leverage among the names shown is 3.6×.
Within the groups below, MLPs tend to have lower leverage. Bellwether Enterprise Products Partners (EPD) ended 2024 with a leverage ratio of 3.1x, which is within its target range of 2.75x-3.25×. Western Midstream (WES) and Plains All American (PAA/PAGP) ended 2024 with leverage ratios of 3.0×.
The corporations shown tend to have a bit higher leverage. This includes names that are seeing strong growth opportunities related to natural gas infrastructure like Kinder Morgan (KMI) and Williams (WMB). Of note, WMB expects a 2025 leverage ratio midpoint of 3.65x, which would be an improvement from 2024 leverage of 3.79×.
The large Canadian C-Corps Enbridge (ENB CN) and TC Energy (TRP CN) have historically had higher leverage, which fits with their larger project backlogs. For example, ENB is expecting its leverage ratio to stay between 4.5x-5.0x, while generating CAD $9 billion to $10 billion in annual investment capacity as it grows EBITDA by around 5%. ENB’s secured growth backlog is at CAD $29 billion.
Many of the larger names in the midstream space also have investment-grade credit ratings, as denoted in the chart. As of March 31, investment-grade companies accounted for 83.4% of AMEI and 64.9% of AMZI by weighting. Investment-grade credit ratings allow companies to borrow at lower rates and save on interest expense. As discussed on the 4Q earnings call, DT Midstream (DTM) continues to pursue an investment-grade credit rating. Having been upgraded by Fitch in October, DTM anticipates an upgrade from at least one of the other two rating agencies this year.
Improved leverage metrics and stronger balance sheets enhance the overall financial positioning of midstream companies. Free cash flow generation further adds to the financial flexibility of energy infrastructure names (read more). These factors arguably ease the path for generous shareholder returns, including dividend growth and equity buybacks (read more). For some names, hitting leverage targets has been a prerequisite to pursuing buybacks.
Stronger financial positioning is also beneficial in an uncertain market environment with tariffs weighing on equities and oil prices. Fee-based business models drive more stable cash flows for midstream and provide relative insulation from commodity volatility. Healthy yields also add to midstream’s defensiveness, with AMZI and AMEI yielding 7.8% and 5.8% as of April 11, respectively. In a challenging market backdrop, midstream’s solid financial footing can be a source of comfort for wary investors.
AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR) and the ALPS Alerian Energy Infrastructure Portfolio (ALEFX).
Related Research:
Midstream and MLPs: Leveled Up With Leverage Down
Midstream/MLP FCF Yields Stay Positive as Capex Rises
Delving Into MLP/Midstream Total Shareholder Yield
4Q24 Midstream/MLP Dividend Recap: Growth Continues
Midstream/MLP 4Q Buybacks Add to Robust 2024
Midstream/MLPs Raising the Bar With Lower Leverage.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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