Intermediary companies experiencing an increase in free cash flow


As the energy industry continues to evolve, a number of companies are moving from aggressive growth to capital efficiency and discipline, resulting in increased free cash flow generation (FCF ) for intermediary companies, writes Alerian in a white paper by Stacey Morris, CFA.

The huge growth the United States has previously seen in power generation, which had been fueled by large investments from energy companies, instead turned to more reserved spending plans in response to investor demands. in matters of capital discipline. With less upstream investment and more moderate production growth, the midstream is also spending less. This change allowed the generation of FCFs even after dividends for intermediary companies in particular.

“For the midstream, the combination of stable cash flow backed by long-term contracts and a significant drop in growth capital spending is leading to a strong generation of FCFs. Unlike other energy sub-sectors where the amount of FCF generated depends on commodity prices, there is better visibility on the intermediate FCF due to its fee-based business model, which generates flows. more stable cash flow, ”Morris writes.

Based on a more subdued US production outlook, projects are no longer primarily about building huge pipelines, but rather smaller individual projects, extensions or joint ventures that require much less capital. This creates a positive dynamic in the performance of the FCF for intermediary companies relative to utilities and the broader market.

Image source: Alerian “Strong generation of free cash flow sets Midstream apart”

The Alerian MLP Infrastructure Index (AMZI) is an MLP-focused index, and the Alerian Midstream Energy Select (AMEI) index contains 25% MLP; the remaining 75% are US and Canadian C companies. The top five companies in both indices are expected to generate positive free cash flow this year, with seven of the nine (not 10, as Enterprise Products Partners is a top company in both indices) expected to generate free cash flow. beyond dividend payments. This additional cash flow can be used by companies to repay debt or be returned to shareholders.

“The expectation of significant free cash flow generation is one of the key pillars of the mid-market investment case today. Midstream’s move from negative FCF returns to generation of FCFs beyond dividends marks a positive transformation for the space, and median FCF returns compare favorably to those of broader stocks and utilities, ”Morris writes. .

As of October 29, AMZI’s yield was 7.40%; AMZI is the underlying index of the Alerian MLP ETF (AMLP) as good as ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). The ETF Alerian Energy Infrastructure (ENFR) has AMEI as the Underlying Index, and the return at the same time was 5.87% for the Index.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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