There have been many positive developments in recent years for the energy infrastructure space, including improvements to balance sheets, the shift to significant free cash flow generation, and progress with ESG metrics, but one of the most notable changes for midstream investors may be the proliferation of buyback programs.
Stacey Morris, CFA, head of energy research at VettaFi said the evolution of midstream/MLPs from frequent equity issuances to self-funding equity to now buying back equity marks a notable transformation.
Energy infrastructure companies repurchased $370 million of their equity in aggregate during the first quarter, according to Morris. This represents a slowdown from the total repurchases seen in 4Q21 and 3Q21 of $650 million and $800 million, respectively, but is above the $300 million spent in 2Q21. Combining the last four quarters, energy infrastructure companies have spent $2.1 billion on equity repurchases.
With strong performance to start 2022, Morris had flagged the potential for buybacks to moderate, particularly for those that emphasize an opportunistic approach and that have seen significant equity price appreciation.
“Arguably, most investors would likely prefer companies spend more on buybacks when their equity prices are lower and spend less when equity prices are rising,” Morris said. “Quarterly buyback spend is likely to fluctuate as management teams consider equity valuations, capital needs, and returning cash to shareholders through dividends.”
Constituents with buyback programs account for more than 70% of the Alerian Midstream Energy Index (AMNA), Alerian MLP Infrastructure Index (AMZI), the Alerian Midstream Energy Select Index (AMEI), and the Alerian Midstream Energy Dividend Index (AEDW), according to Morris.
AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMNA is the underlying index for the ETRACS Alerian Midstream Energy Index ETN (AMNA). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR). AEDW is the underlying index for the ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND).
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