Midstream Energy: Dividend Growth and Natural Gas Demand Drive 2025 Outlook

Published Date: December 9, 2024 | Author: Stacey Morris, Head of Energy Research, VettaFi

North American midstream corporations are expected to continue enjoying the tailwinds from free cash flow in 2025. Dividend growth is expected to remain a priority, while buybacks will vary by company. Capital spending may be elevated relative to recent years as companies see attractive growth opportunities related to natural gas. However, elevated spending is not expected to derail the free cash flow trend.

From a macro energy perspective, US natural gas fundamentals are expected to improve in 2025. New demand from additional liquefied natural gas (LNG) export capacity should be supportive for gas prices. That said, prices will also depend on winter weather and inventories heading into the spring. Natural gas production that was shut-in due to weak prices in 2024 will likely return, which should be positive for midstream assets.

More broadly, the multi-year outlook for US natural gas demand growth remains constructive driven predominantly by rising exports and increased demand for power generation, including from data centers. Rising demand should support production growth. Midstream companies will play a critical role in connecting production with end demand, creating growth opportunities for companies with natural gas infrastructure. In 2025, these companies are expected to announce more projects and provide greater visibility to growth for the end of this decade and beyond.

Turning to crude, a cautious oil outlook is likely warranted in 2025. Global oil markets remain well supplied, and the potential unwind of OPEC+ cuts would be detrimental to market balances. Concerns around the global economy continue to weigh on the outlook for oil demand. On the other hand, supply risks related to ongoing geopolitical unrest could provide support for oil prices. A new administration in Washington, D.C., could also lead to changes in the geopolitical landscape with implications for oil markets.

A tempered oil market outlook can favor midstream given its defensive qualities provided by fee-based businesses. Midstream companies typically generate stable cash flows and are more insulated from commodity price volatility. Healthy dividends also add to midstream’s defensiveness. Additionally, the underlying index for the Alerian Midstream Energy Divided UCITS ETF tends to be biased towards companies with natural gas infrastructure (70% of the index by weighting as of 20 November).

Finally, midstream has rallied following US election results, as has the broader energy sector. While the election outcome is not expected to impact US energy production, the White House and Congress are expected to be more oil and gas friendly. The LNG export permit pause instituted by the Biden Administration in January 2024 is expected to be lifted quickly. The Republican sweep also improves the prospects for permitting reform, which would be welcomed by the industry.

Overall, the outlook for midstream into 2025 remains constructive driven by company-level tailwinds from free cash flow generation. Midstream’s defensive qualities may prove beneficial given a cautious outlook for oil. Meanwhile, the robust outlook for North American natural gas demand can continue to drive positive momentum in equities, particularly as companies announce more growth projects with attractive returns.

For professional investors only. When you invest in ETFs your capital is at risk.

Alerian Midstream Energy Dividend UCITS ETF (MMLP) aims to provide diversified exposure to midstream energy corporations involved in the processing, transportation and storage of oil, natural gas and natural gas liquids in the US and Canadian markets.

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