2023-06-22 15:33:37 ET
The U.S. oil and gas pipeline and infrastructure sector has "entered a new period of elevated capital returns," according to Citi analyst Spiro Dounis, who sees sector free cash flow rising in the coming years as debt levels have dropped sharply.
Dounis expects midstream companies will generate 15% of their market cap in free cash flow over the next five years even after paying a ~7% dividend, which amounts to nearly $50B of excess cash; the analyst said the group generated no excess cash flow in aggregate during the most recent five-year period.
The analyst said three key factors have made this excess cash flow shift possible: Shale growth has slowed and become more ratable, which in turn has moderated capital spending; midstream companies have spent the last three years de-levering and have largely achieved leverage targets, which releases capital back to equity holders; and companies are able to maintain growth rates due to brownfield expansions which are highly capital efficient.
Citi sees EnLink Midstream ( NYSE: ENLC ) and Aris Water Solutions ( NYSE: ARIS ) contributing the most "excess cash flow generation," at more than 35% each, with Western Midstream ( WES ), Energy Transfer ( ET ) and Plains All American Pipeline ( PAA ) topping 25%.
Generating the least excess cash flow in the group, at below 10% each, according to Citi: DT Midstream ( NYSE: DTM ), Kinetik Holdings ( KNTK ), Hess Midstream ( HESM ), Kinder Morgan ( KMI ) and Delek Logistics Partners ( DKL ).
More on EnLink Midstream:
- Financial and valuation comparison to sector peers
- Analysis: EnLink Is A Steal At Sub-$9
- Stock price return: Down 15.5% YTD, up 13.5% in the past 12 months
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Energy midstream enters 'new period of elevated capital returns,' Citi analyst says