Raymond James Analyst Shares Stock Picks & Constructive Midstream Outlook

Weston: It’s still a really good time to be looking at midstream. I think the main thing has been the interest in the space because of the additional demand growth domestically for natural gas. The LNG [liquefied natural gas] theme has been in focus for a while, and it’s, frankly, becoming bigger numbers. But the thing that’s made the group more interesting to a wider range of investors has been the power demand theme. I think there’s still a lot to come from that theme.  

There are a few other things we’ve been discussing during the volatility that we’ve seen over the last month or two. I think the defensive characteristics of midstream have been a lot more topical. Most notably, the balance sheets are as good as they’ve probably ever been in the history of the sector. I think median leverage for the group is literally two turns lower relative to where it was when I started covering the space. So leverage is obviously better.

I think the other thing that plays into the defensive characteristics is all of the M&A we’ve seen over the last few years — both in upstream and in midstream. Specific to midstream, these are just more diversified companies that have some more natural hedges today. There’s just a lot of different drivers for these businesses than maybe historically was the case. 

A good example of that is ONEOK (OKE) with all the different asset types they’ve layered onto the business. Historically, they would have been a company where oil falling to $59/barrel would have driven a lot of concern about the outlook for the Bakken. That region was a significant needle mover for them just a few years ago. But now, with all of the diversification they’ve layered on through M&A, it’s just not nearly as impactful as it used to be. If that concern exists, it’s just downplayed quite a bit given the asset mix. 

The upstream M&A has been important too. When I look at the group, it’s nice to see how much exposure to the majors [Exxon, Chevron ] there is. These are customers that think through the cycles and typically plan in five to 10 year patterns. They don’t actually change plans much when you see oil prices go down — even with a $10 or $15 move like we’ve seen recently. I think that additional layer of protection is really helpful. The overall discipline in the producer space also just mutes some of the cyclicality of the group.

All of those things come together to make this a more defensive subsector than it has ever been. It’s historically viewed as somewhat defensive, certainly relative to the rest of the energy sector. But I think those characteristics are only improved today. 

One other thing is that the whole supply-push conversation is just a little less important than it used to be. This is probably the biggest demand-pull-driven growth slate that we’ve seen for the group. Demand pull is usually contracted quite a bit differently than supply push. It’s obviously a different set of customers and counterparties (e.g., utilities). When you layer the organic growth from that customer set on top of the greater stability from upstream customers, it’s just a really nice setup for the businesses operationally, today and going forward.  

The last piece of this has to be valuation. The stocks sold off to end 2024. They saw some weakness in response to DeepSeek, and then were pressured recently around tariff news. When you take all of that, together with pretty resilient EBITDA generation, that has made this group look cheaper.

We had a pretty big run-up right after the election, and it was a little tough to justify the valuation in some of these stocks. That is not the case today. Again, estimates are basically the same. The stocks have ebbed and flowed here. But they’re not nearly as expensive as they were at the peak around mid-November. I think that makes this group pretty interesting as well.

The total return opportunity is still really attractive for the space. You’re probably going to see dividend and distribution growth from a lot of these players still. Maybe even some buybacks on the weakness here. For the marginal investor — whether it’s retail or a generalist — looking at MLPs with 7%-9% yields that are probably safe and payouts may be growing, those yields look really attractive to people, especially in an environment where there’s so much disruption elsewhere. There are a lot of things that I still like about the space right now.

A few different things, including some items related to the themes that we just talked about. I think there’s always an element of companies hand-holding on the supply push when you see some weakness in commodity prices. So some commentary around how producer budgets or development plans may have shifted will be pretty topical. 

I think we’re all still looking for the next round of project updates tied to the power theme. It does seem like some of the companies that have had some wins already are probably poised for a few more. Williams (WMB) has some detail on their website now, talking about an additional gigawatt of opportunities by 2027. If you’re going to get something done by 2027, you need to be announcing pretty soon. And it’s supposedly 1 gigawatt of incremental opportunity — beyond the initial project in Ohio they’ve announced. So that’s a pretty large number. And they’re not the only one that’s involved in that space. So I think some updates there will certainly be helpful. 

The other one I’m watching that’s finally getting a little more attention is NGLs. A couple years ago, before we started talking about gas demand so much, there was a lot of focus on the competitive dynamics and supply aggregation in the NGL markets. There’s a lot of reasons why that’s gotten more interesting as of late. Supply aggregation is harder when supply growth is smaller.

So first, I’m looking at what is being done in this space competitively or even from an M&A perspective, as these companies are just trying to protect or gain market share. Then, additionally with the project announcement that ONEOK (OKE) and MPLX (MPLX) had last quarter, you’ve got another entrant that’s getting all the way to the water that’s very competitive in this space. So does that change some things a little bit? I think that’s going to be very topical from just an operational perspective.

On the financial side of things, we’re getting a lot of questions around flexibility of capex. So that’s one of the concerns. It ties to the supply push conversation to a degree. It ties to demand pull. That’s because you’ve seen some commentary that Microsoft and AWS and some others are starting to pull back on some leases for data centers. I think it’s maybe a little bit overplayed, especially the domestic changes.

But there’s some skepticism around whether we will really need these capital plans the companies have outlined. Capex did move a fair bit higher last quarter, pretty much across the group. So there’s an element of needing to justify the spend. The market also needs to understand what can be deferred, what can be delayed, and what is still likely needed. All of that conversation I think will be interesting on the quarterly calls.

The last few months have been about tariffs and inflation. We saw some commentary last quarter, and then already from Kinder Morgan (KMI) last week. But I think it remains a pretty topical question. There are ways to mitigate the potential for some price increases, but it’s going to be something that investors care about. It ultimately ties to the capex conversation as well. So those would be the main things I’m watching for this earnings cycle.

Our top picks cover a range of companies. At Raymond James, “Strong Buy” is our best recommendation category. We have six strong buy tickers: Enterprise Products Partners (EPD), Energy Transfer (ET), Plains All American (PAA), and then our C-corps, in addition to PAGP, are Cheniere Energy (LNG) and Targa Resources (TRGP).Those are our top five or six. We probably cover about 25 names. There are another 10 or so that we like, but those are our favorites right now.

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