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Midstream Buybacks Gain Traction on Free Cash Flow Recovery
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The energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. Also, adding to this bullish narrative is the OPEC+ production cut and a supportive government policy. Consequently, the demand for oil and gas is flourishing.
Midstream Companies Flush with Cash
With crude prices rallying to $70 and natural gas surging to seven-year highs amid the macro tailwinds, all subsets of energy are set to gain going forward. But the midstream energy companies — the ones engaged in the transportation, storage, and processing of energy commodities — have the potential to be the outsized beneficiaries of this supportive environment.
The assets that these firms own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycles.
Of late, the midstream operators have started to see higher volumes move through their systems. The transportation of more hydrocarbon resources has helped them earn more, which, in turn, has led to increased free cash flow after dividends. As most companies have already reduced debt to manageable proportions by prioritizing balance sheet health during the 2020 oil-market downturn, they are now using the surplus cash flow to increase shareholder returns through buybacks.
With stock repurchase gaining traction in the midstream space, let’s take a look at some recent capital deployment activities.
MPLX LP (MPLX - Free Report) , one of the bigger pipeline entities with a market capitalization of nearly $30 billion, repurchased $155 million in units during the second quarter. The partnership currently has approximately $657 million remaining under its board authorization.
Plains All American Pipeline (PAA - Free Report) was able to buy back some $50 million worth of units in the June quarter. In fact, the partnership has earmarked 25% of 2021 free cash flow (after payouts) for equity repurchases.
Magellan Midstream Partners, L.P. , the operator of a diversified portfolio of energy infrastructure assets, returned $82.3 million to unitholders during the second quarter of 2021 via buybacks. This Zacks Rank #3 (Hold) firm’s $750 million program is authorized through 2022.
Considering the fairly stable energy market situation, smaller midstream players were also actively engaged in buybacks, with the likes of Rattler Midstream LP and EnLink Midstream, LLC (ENLC - Free Report) recently repurchasing equities worth $5.2 million and $10 million, respectively.
Looking Ahead
Based on improving oil and gas fundamentals, the energy infrastructure space is expected to remain attractive. A robust income proposition should translate into more generous post-dividend free cash flows for the industry incumbents. With leverage targets largely under control, this could mean higher buyback activity (existing as well as new) in the near-to-medium term. A case in point is last week’s announcement by midstream biggie The Williams Companies (WMB - Free Report) to approve a new share repurchase program worth $1.5 billion, which was implemented with immediate effect.
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Midstream Buybacks Gain Traction on Free Cash Flow Recovery
The energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. Also, adding to this bullish narrative is the OPEC+ production cut and a supportive government policy. Consequently, the demand for oil and gas is flourishing.
Midstream Companies Flush with Cash
With crude prices rallying to $70 and natural gas surging to seven-year highs amid the macro tailwinds, all subsets of energy are set to gain going forward. But the midstream energy companies — the ones engaged in the transportation, storage, and processing of energy commodities — have the potential to be the outsized beneficiaries of this supportive environment.
The assets that these firms own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycles.
Of late, the midstream operators have started to see higher volumes move through their systems. The transportation of more hydrocarbon resources has helped them earn more, which, in turn, has led to increased free cash flow after dividends. As most companies have already reduced debt to manageable proportions by prioritizing balance sheet health during the 2020 oil-market downturn, they are now using the surplus cash flow to increase shareholder returns through buybacks.
With stock repurchase gaining traction in the midstream space, let’s take a look at some recent capital deployment activities.
MPLX LP (MPLX - Free Report) , one of the bigger pipeline entities with a market capitalization of nearly $30 billion, repurchased $155 million in units during the second quarter. The partnership currently has approximately $657 million remaining under its board authorization.
Plains All American Pipeline (PAA - Free Report) was able to buy back some $50 million worth of units in the June quarter. In fact, the partnership has earmarked 25% of 2021 free cash flow (after payouts) for equity repurchases.
Magellan Midstream Partners, L.P. , the operator of a diversified portfolio of energy infrastructure assets, returned $82.3 million to unitholders during the second quarter of 2021 via buybacks. This Zacks Rank #3 (Hold) firm’s $750 million program is authorized through 2022.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Considering the fairly stable energy market situation, smaller midstream players were also actively engaged in buybacks, with the likes of Rattler Midstream LP and EnLink Midstream, LLC (ENLC - Free Report) recently repurchasing equities worth $5.2 million and $10 million, respectively.
Looking Ahead
Based on improving oil and gas fundamentals, the energy infrastructure space is expected to remain attractive. A robust income proposition should translate into more generous post-dividend free cash flows for the industry incumbents. With leverage targets largely under control, this could mean higher buyback activity (existing as well as new) in the near-to-medium term. A case in point is last week’s announcement by midstream biggie The Williams Companies (WMB - Free Report) to approve a new share repurchase program worth $1.5 billion, which was implemented with immediate effect.