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Market Commentary: Midstream Companies Have Longer Runway for Sustained Earnings Growth

Yves Siegel

MIDSTREAM ENERGY STOCKS CONTINUE TO OUTPERFORM

Midstream energy stocks have outperformed the S&P 500 since 2021. Midstream (as measured by the AMNAX) have provided a total return of 205.5% vs. 71.2% for the S&P 500 over the four-year period from January 2021 to January 2025.

 

Total Return Since 12/31/20

Source: S&P Global and Bloomberg

 

WHY MIDSTREAM HAS PERFORMED WELL:

  • Shift of energy transition narrative. The idea that the “energy transition” would erode and ultimately end fossil fuel has been debunked. (Please see our Market Commentary, "A World Without Fossil Fuels," dated November 2020 for details). That narrative meant that midstream assets would become obsolete sooner than later. Obviously, this is not the case.

  • Surging power demand from AI, data centers, and onshoring. Artificial Information (AI), data centers and onshoring of manufacturing in the U.S. will jump start power demand. Natural gas is the big winner here due to its round-the-clock availability, abundance, and cost effectiveness. (Please refer to our Market Commentary, "The Energy Sector is an Artificial Intelligence Beneficiary," dated May 2024 for details.)

  • Global demand for liquefied natural gas (LNG). The U.S. is now the largest exporter of natural gas and continues to expand its capacity to meet growing worldwide demand. Please see LNG discussion on page 2 for details.

  • Earnings growth has exceeded expectations. Midstreams are thriving due to successful execution of high return projects, bolt-on acquisitions, and accretive industry consolidation.

  • Improved financial discipline. Paradigm shift of not outspending cash flow and raising the bar on capital investments have resulted in deleveraged balance sheets and returning more cash to shareholders.

  • Supportive energy policies. More recently, President Trump’s pro-energy policies promote building midstream infrastructure. For example: streamlining of regulations, opening of federal lands to drilling, termination of the LNG pause, encouragement of U.S. energy exports, better prospects for permit reform, and commitment to building U.S. dominance in AI.

  • Lower risk, higher rewards. All the above has led to lower risk and higher stock prices. Balance sheet strength, less reliance on external capital, and sustainable earnings cushion midstream companies in the event of a cyclical downturn.   Further, there is better visibility of a longer runway for sustained earnings growth. In our view, this justifies higher valuation multiples and higher stock prices.

     

    Valuation Perspective. Midstream companies are still trading below the 10-year average (e.g., EV-to-EBITDA multiple of 11.0x vs. 11.7x as of Q4’24). We believe that momentum can drive these stocks higher.

     

    Midstream EV/EBITDA Multiple 

    Source: Wells Fargo Midstream Monthly Outlook: January 2025


    Sam Partners’ Infrastructure Income and Energy Transition Strategies seek to provide sustainable income and growth with capital preservation. The strategies favor companies leveraged to improving natural gas fundamentals. We remain positive on the following midstream stocks: Cheniere Energy, Inc. (NYSE-LNG), DT Midstream, Inc. (NYSE-DTM), EQT Corporation (NYSE-EQT), Energy Transfer LP (NYSE-ET), Kinder Morgan Inc. (NYSE-KMI) and the Williams Companies, Inc. (NYSE-WMB).

     

    LNG PAUSE LIFTED: POSITIVE FOR NATURAL GAS

    As promised, President Trump lifted the Biden’s administration 2024 pause on issuing new LNG export permits to non-FTA nations. Based on the President’s remarks, we are likely to see a more expeditious (with hopefully less litigious roadblocks) permitting process.

     

    Perhaps not a coincidence, on December 17, the Department of Energy (DOE) and S&P Global independently released analyses on the future impact on increasing U.S. LNG exports. Former U.S. Secretary of Energy Jennifer M. Granholm’s statement regarding the DOE study was decidedly negative (and perhaps partisan), focusing on potentially higher consumer costs (which appear minimal to us), higher global GHG emissions (debatable), potential for global supply to outstrip demand (possible), and increased exports to China. Her statement failed to highlight the significant economic benefits to the U.S. and did not seem to be an unvarnished summary of a rather sterile report.

     

    In stark contrast, the S&P report, co-authored by distinguished energy historian Daniel Yergin, Vice Chairman of S&P Global, paints a much more optimistic look at growing U.S. LNG exports. For context, in February 2016, Cheniere Energy became the first U.S. company to export LNG (from its Sabine Pass terminal in Louisiana). Since then, Cheniere has become the world’s second-largest LNG operator and the U.S. has become the number one exporting country. Cheniere and the U.S. account for approximately 11% and 22%, respectively, of total global LNG supply.

     

KEY TAKEAWAYS FROM S&P GLOBAL’S LNG REPORT:

1)   Significant positive impact for the U.S. economy. S&P Global estimates that the LNG industry has contributed $408 billion to U.S. GDP and supported an average of 273,000 jobs since 2016. Moreover, the study assumes that U.S. exports more than double to 28 Bcf/d by 2030. This is expected to add a cumulative increase of $1.3 trillion to GDP by 2040 and an average of 495,373 jobs annually over the 2025-2040 period. U.S. LNG exports are now one of the fastest growing U.S. export industries according to the report. Additionally, LNG exports fit well with President Trump’s commitment to reduce the U.S. trade deficit.

 

2)   Abundant U.S. natural gas resource. The U.S. has a natural gas reserve life of more than 35 years. Since the shale revolution began in 2010, U.S. natural gas production has grown by over 40 Bcf/d. This is about three times the 13 Bcf/d that the U.S. currently exports. Put another way, LNG exports account for roughly 12% of U.S. natural gas production.

 

3)   Exports support our global allies. U.S. LNG supplies to Europe replaced ~42% of the loss of imported Russian piped gas following Russia’s invasion of Ukraine. Further, 23% of U.S LNG exports provide energy to developing countries.

 

Global LNG Demand (Base Case)

Source: S&P Global Commodity Insights


4)   LNG adoption facilitate more rapid decarbonization worldwide as it displaces coal and traditional wood and waste biomass. The report notes that the switch from coal to natural gas made possible the most significant reduction in U.S. CO2 emissions from 2005 to 2020.


Global Primary Energy Demand by Fuel (S&P Global ‘Infections’ Base Case) 

1 STEPS= Stated Policies Scenario.

Source: International Energy Agency (IEA), S&P Global Commodity Insights

 

5) Conclusion: Growing exports has minimal impact on natural gas prices. “The benefits of LNG exports come at minimal costs to U.S. consumers given the vast U.S. resource (<1% residential natural gas price increase to 2040), and these are many times exceeded by the economic benefits of further development that flow across the nation's economy.”

 

Note: The S&P study assumes still rapid global growth in renewables, solar and wind, through 2040, 10 times expected gas demand growth in the same period.

 

DECEMBER REVIEW: ENERGY SLIDES IN DECEMBER

The rundown:

  • In December, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of -6.5% compared to        -2.4% for the S&P 500 and -6.7% for its customized benchmark. In 2024, SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 40.9% compared to 25.0% for the S&P 500 and 25.8% for its customized benchmark.

  • In December, SAM’s Energy Transition Portfolio generated a return (net of fees) of -6.4% versus -6.8% for its customized benchmark. In 2024, SAM’s Energy Transition Portfolio generated a return (net of fees) of 22.6% versus 5.9% for its customized benchmark.

 

  • SAM’s portfolios are more heavily weighted in Midstream, which has outperformed relative to utilities and the clean energy sector in December and in 2024.

  • Midstream outperformed in December with a total return of -6.1% and was up 44.5% in 2024, as measured by the AMNAX.

  • Utilities and the clean energy sector underperformed the overall market, generating a total return of -8.0% and -7.0% in December and +20.9% and -25.5% in 2024, as measured by the Philadelphia Stock Exchange Utility Index (XUTY) and the S&P Global Clean Energy Index (SPGTCLTR), respectively.


  • In December, only three out of eleven sectors in the S&P 500 reported positive total returns with communication services as the best performer and materials as the worst. Energy delivered a -9.5% monthly total return. With the exception of materials, all other sectors in the S&P 500 reported positive total returns in 2024 with communication services as the best performer and materials as the worst. Energy delivered a 5.7% total return in 2024. December month-end WTI crude oil and Henry Hub natural gas prices were $72.44 Bbl and $3.40 per MMBtu, up ~6% and up ~0.3%, respectively, from last month and up ~1% and ~32%, respectively, from last year.


RESULTS: SINCE INCEPTION & ONE YEAR

  • SAM’s Infrastructure Income Portfolio produced a return (net of fees) of 130.2% and 40.9% for the periods since 11/10/20 inception and 1-year, respectively. This compares to a total return of 117.1% and 25.8%, respectively, for its customized benchmark and 76.7% and 25.0%, respectively, for the S&P 500 as of 12/31/24.


  • SAM’s Energy Transition Portfolio generated a return (net of fees) of 23.6% and 22.6% for the periods since 4/29/21 inception and 1-year, respectively. This compares to a total return of 19.1% and 5.9%, respectively, for its customized benchmark and 47.7% and 25.0%, respectively, for the S&P 500 as of 12/31/24.

  

2024 Total Return

Source: Bloomberg, NASDAQ and S&P Global


Sam Partners’ Infrastructure Income and Energy Transition Strategies seek to provide sustainable income and growth with capital preservation. This is accomplished by investing in a concentrated portfolio of high-quality midstream energy companies, utilities and clean energy companies that are well positioned to participate in the energy transition to a net zero carbon future. A diversified approach to investments across these sectors should optimize risk-adjusted returns, in our view. Our Infrastructure Income Strategy offers investors a current yield of ~4.0% and growth potential of ~5-7%; while the Energy Transition Strategy that is more heavily weighted with clean energy stocks and aligns with favorable ESG ratings, offers investors a current yield of ~3.5%. In a world searching for yield, we believe these Strategies offer a compelling value proposition.


IMPORTANT DISCLOSURES

Siegel Asset Management Partners is a registered investment adviser located in Plainview, New York. The views expressed are those of Siegel Asset Management Partners and are not intended as investment advice or recommendation. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, Siegel Asset Management Partners' returns reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

 

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November, 2020

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