Summary
- Midstream companies are expected to continue generating free cash flow and prioritizing returns to shareholders.
- A muted oil outlook can favor midstream given its defensive qualities, namely fee-based businesses and generous yields.
- Natural gas project announcements, M&A activity, and policies in Washington bear watching in 2025.
Energy infrastructure companies saw another strong year in 2024. The Alerian MLP Infrastructure Index (AMZI) was up 26.7% on a total-return basis, marking four straight years of 20+% gains. The Alerian Midstream Energy Select Index (AMEI), which includes 75% corporations and 25% MLPs, was up 43.1% on a total-return basis. Both indexes outperformed the S&P 500, which had a total return of 25.0%.
With another strong year in the books, investors will be wondering if the momentum can continue in 2025. From a company-level and macro standpoint, there seems to be plenty working in midstream’s favor, supporting a constructive view for this year.
To learn more about the 2025 outlook, please join us Wednesday, January 15, at 1 p.m. EST for our webcast, “After a Strong 2024, Do MLPs/Midstream Have More in the Tank?” Register here.
Midstream/MLPs: New Year, Same Play Book.
The company-level outlook for midstream is largely consistent with recent years. Companies are expected to continue generating free cash flow and prioritizing returns to shareholders. Dividend growth will remain a top priority, while buybacks are expected to be more opportunistic. A handful of companies have provided guidance for dividend growth or already announced increases for next year. (Stay tuned for a future note on this topic.) As of January 3, AMZI and AMEI were yielding 7.0% and 5.2%, respectively.
A key theme across energy last year was the strengthening outlook for US natural gas demand driven by exports, power generation (including for data centers), and industrial reshoring (read more). Relative to recent years, more growth project announcements are anticipated in 2025, particularly related to natural gas. For example, Kinder Morgan (KMI) sanctioned its Mississippi Crossing project in December, and the release noted that additional project announcements are anticipated in the coming months. For some names, growth opportunities could lead to elevated capital spending, but the free cash flow trend is not expected to be derailed. Buybacks may be more limited as companies pursue growth projects.
Macro: Challenged Oil Outlook Favors Midstream. More Optimism for Natural Gas Prices.
Midstream is relatively insulated from oil and gas prices due to its fee-based business model. However, commodity price expectations can impact energy sentiment and how investors view midstream relative to other subsectors. This year, the outlook for oil prices is fairly muted, while there is more optimism surrounding natural gas. This backdrop arguably favors midstream.
In 2024, natural gas prices were exceedingly weak, and production was curtailed in response. While weather remains a wildcard, gas prices are expected to improve as new LNG export capacity comes online. Cheniere (LNG) announced first LNG at its Corpus Christi Stage 3 expansion in late December, while Venture Global’s Plaquemines Phase 1 shipped its first LNG cargo last month.
The Bloomberg median gas price forecast for 2025 and 2026 is $3.25 and $3.64 per million British thermal unit (MMBtu), respectively, as of January 2. This compares to a 2024 average of $2.41/MMBtu. For midstream, higher natural gas prices could drive more volumes for gathering and processing assets as curtailed production is restored and/or upstream activity increases (read more).
Turning to crude, a cautious oil outlook is likely warranted in 2025. Concerns around the global economy and ongoing weakness in Chinese demand continue to weigh on oil forecasts. Global oil markets remain well supplied, and the eventual unwind of OPEC+ cuts can be an overhang. To be fair, OPEC+ has delayed the unwind three times since September, and the group is clearly treading carefully. Geopolitical risk remains topical, and the landscape can change quickly in response to world events. The Bloomberg median forecast for WTI oil prices in 2025 is $70 per barrel (bbl) as of January 2, compared to a 2025 average of $76/bbl.
A tempered oil outlook can favor midstream given its defensive qualities, namely fee-based businesses and generous yields. Dedicated energy investors may shift more towards midstream, or probably already have, given that it can be difficult for broad energy stocks to do well if oil prices are in a holding pattern.
Moderate Production Growth Expected. Stronger Prices Could Drive Upside for Gas.
With US producers focused on capital discipline, moderate US oil and gas production growth is likely this year. Moderate growth is constructive for midstream. The US Energy Information Administration (EIA) is forecasting 280 thousand barrels per day (MBpd) of oil production growth in 2025 based on annual averages. This is in line with the estimated production growth seen in 2024. The EIA expects production of natural gas liquids (NGLs) to grow by 70 MBpd.
For natural gas, production in 2024 was essentially flat. Growth in associated gas from the Permian offset declines in gas-focused basins like the Haynesville, where producers curtailed volumes in response to low prices. The EIA is forecasting 0.7 Bcf/d of natural gas production growth in 2025. However, their price forecast of $3/MMBtu is a bit more bearish than the median forecast from Bloomberg. Production growth could be more noticeable if natural gas prices can sustain their recent strength. Natural gas prices closed at $3.66/MMBtu on January 2.
What to Watch in 2025.
At the company level, there are several issues for investors to keep an eye on this year. Front and center will be natural gas growth projects as discussed above. M&A activity also bears watching after a fairly eventful year for asset-level deals and larger transactions in 2024 (read more). Investors will also be looking for continued execution on shareholder returns, namely dividend growth.
Investors may also be looking at MLP performance relative to C-Corps after a noticeable performance gap last year. In 2024, AMZI was up 26.7% compared to a total return of 45.5% for the Alerian Midstream Energy Corporation Index (AMCC). C-Corps are generally more exposed to the expected growth in natural gas demand. For context, MLPs outperformed corporations in 2023 and 2022, while C-Corps outperformed MLPs in 2020 and 2021.
Will the performance gap close in 2025? MLP valuations are relatively more attractive, but investors may prefer C-Corps to play natural gas demand growth. At the end of December, AMZI was trading at 8.66x on an EV/EBITDA basis using 2026 consensus estimates compared to its ten-year average of 9.9x. AMEI was trading at 10.16x based on 2026 estimates compared to its ten-year average forward multiple of 11.0x. (AMEI is used here for its longer history.)
Activity in Washington may also be a focus in 2025. LNG export permits are expected to be granted again under the new administration. The White House could also have implications for oil prices through foreign policy and trade (tariffs generally negative for global trade and therefore oil demand). Inflation has also been more topical lately, and it bears mentioning that energy infrastructure’s real asset exposure can be attractive when inflation is a concern. Midstream has historically performed well in periods of elevated inflation (read more).
With several provisions of the 2017 Tax Cut and Jobs Act set to expire at the end of 2025, taxes are likely to be topical. For midstream corporations and MLPs, tax issues like bonus depreciation and interest limitation deductions can be needle-moving. The Republican sweep also likely improves prospects for broad permitting reform, which would be welcomed by the industry (read more). Strong midstream/MLP performance following the election likely reflected some optimism around tax policies and permitting reform.
Bottom Line:
Company-level tailwinds from free cash flow, a cautious oil outlook, expectations for moderate production growth, and the potential for good news from Washington on the policy front all contribute to a constructive view for midstream/MLPs into 2025.
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 Alerian Energy Infrastructure Portfolio (ALEFX).
Related research:
An Almost-Free Lunch? Capital-Efficient Midstream Growth
Energy, the Election, and Permitting Reform
Midstream’s Natural Gas Outlook Continues to Strengthen
2024 Midstream M&A Recap: Permian & Gas in Focus
Understanding the Inflation Tailwind for Midstream/MLPs
For more news, information, and analysis, visit the Energy Infrastructure Channel.
VettaFi LLC (“VettaFi”) is the index provider for AMLP, MLPB, ENFR, and ALEFX, for which it receives an index licensing fee. However, AMLP, MLPB, ENFR, and ALEFX are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing or trading of AMLP, MLPB, ENFR, and ALEFX.