Midstream/MLP Buyback Update

09/28/21 | Stacey Morris, CFA

Summary

• Given significant free cash flow generation, several midstream companies have announced buyback authorizations to complement generous dividends in returning cash to shareholders.
• Companies with buyback authorizations represent a significant portion of Alerian’s energy infrastructure indexes by weighting.

As energy companies try to attract investors with strong free cash flow generation and shareholder-friendly returns, capital allocation remains a focus across the sector, including midstream. Midstream’s fee-based business model provides steady cash flows, and the significant step-down in growth capital spending for most names is allowing for meaningful free cash flow generation. With this excess cash flow, several midstream companies have announced buyback authorizations to complement generous dividends in returning cash to shareholders.


For midstream investors, buybacks represent a tangible proof point of positive changes for the space in recent years. Leading up to peak capital spending in 2018/19, companies frequently issued equity to fund growth projects. Now, midstream companies are reaping the cash flows from those projects, spending less on growth opportunities, and generating excess cash flow that can be used for buybacks, or in some cases, dividend increases. Prior to C-Corp Williams’ (WMB) $1.5 billion buyback authorization announcement earlier this month, WMB’s management emphasized on their 2Q earnings call that they are forecasting significant excess free cash flow even with continued dividend growth, ongoing improvements in credit metrics, and investments in their base business and new energy ventures. After checking those boxes, they see significant dry powder for buybacks. Other midstream companies likely have a similar outlook, which has led to a proliferation of midstream buyback programs.


The table below shows the midstream companies with buyback authorizations in place and each company’s weighting in the Alerian Midstream Energy Index (AMNA), the Alerian MLP Infrastructure Index (AMZI), the Alerian Midstream Energy Select Index (AMEI), and the Alerian Midstream Energy Dividend Index (AEDW) as applicable. Some companies have arguably been more active with buybacks than others, but it bears mentioning that many of these authorizations were established in 4Q20. For multi-year buyback programs, it is still early innings, and some companies have prioritized debt reduction over buybacks or in parallel. Cheniere (LNG) has one of the longer-tenured buyback programs, with its authorization dating back to 2019. In unveiling its capital allocation plan earlier this month, which included initiating a dividend, Cheniere announced that it would reset its buyback authorization to $1 billion for three years beginning in 4Q21. As companies continue to generate excess cash flow and achieve leverage targets, buybacks are expected to remain an important component of shareholder returns for midstream MLPs and corporations beyond dividends.

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AMNA is the underlying index for the ETRACS Alerian Midstream Energy Index ETN (AMNA). 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). AEDW is the underlying index for the Alerian Midstream Energy Dividend UCITS ETF (MMLP) and the ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND). 

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