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Midstream Energy Firms Plow Soaring Cash Flows Into Buybacks

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The year 2021 could well be construed as one of recovery for the Oil/Energy market. Profits across the space have bounced back from last year's pandemic-driven slump in consumption and prices. Strong commodity prices and a bullish demand picture pushed up free cash flow, which has allowed energy operators to step up shareholder distributions.

In particular, with impressive bottom-line numbers, energy infrastructure companies like  Enterprise Products Partners EPD, MPLX LP MPLX, Magellan Midstream Partners MMP, Plains All American Pipeline PAA and Western Midstream Partners WES are returning more capital to investors in the form of stock buybacks.

Midstream Firms Putting Money Into Buybacks

With crude prices rallying to $70 and natural gas trading around 50% above the year-ago levels  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, we have zeroed in on some recent capital deployment activities.

Let’s start with Enterprise Products Partners. The midstream blue-chip repurchased approximately $75 million (or 3.4 million units) in the third quarter as it generated a record $2.4 billion of cash from operating activities. As of Sep 30, 2021, Enterprise Products Partners bought back some $387 million units under its $2 billion buyback program.  

Enterprise Products Partners’ repurchase scheme began in January 2019 with no time limit set for its completion. EPD’s total buyback target amounts to roughly 4.4% of its current stock market value.

MPLX, another one of the bigger pipeline entities with a market capitalization of nearly $30 billion, repurchased $155 million in more than five million units during the third quarter. Investors should note that the partnership’s net cash provided by operating activities amounted to $1.2 billion in the third quarter. This allowed MPLX to hike its payout by 2.5% and institute a special distribution of 57.50 cents per unit.

MPLX’s $1 billion unit buyback program was announced in November 2020 and currently has approximately $500 million remaining under its board authorization. The partnership’s total repurchase target amounts to approximately 3.5% of its total current stock market value.

Magellan Midstream Partners, the operator of a diversified portfolio of energy infrastructure assets, returned $391 million to unitholders during the third quarter of 2021 via buybacks. This Zacks Rank #3 (Hold) firm paid out $391 million, exhausting its $750 million authorization program that was to run through 2022.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In October, the board of directors of Magellan Midstream instituted another repurchase scheme of up to $750 million. Coming in conjunction with a 1% increase in distribution, MMP’s buyback authorization is effective until Dec 31, 2024. Magellan Midstream’s latest unit repurchase accounts for approximately 8% of the total current market capitalization.

Meanwhile, Plains All American Pipeline was able to buy back some $64 million worth of units in the September quarter in addition to reducing total debt by approximately $650 million. Plains All American Pipeline, which has earmarked 25% of 2021 free cash flow (after payouts) for equity repurchases, has cumulatively purchased around $167 million (or 18.1 million units) under its $500 million authorization.  

Plains All American Pipeline’s repurchase scheme began in Nov 2020 with no time limit set for its completion. PAA’s total buyback target amounts to roughly 7.8% of its current stock market value.

Finally, we have Western Midstream Partners, which was also actively engaged in buybacks during the most recent quarter. Considering the fairly stable energy market situation, Western Midstream Partners repurchased 4.5 million equities worth $88.1 million.

Western Midstream Partners’ $250 million unit buyback program runs through the end of this year and currently has approximately $113 million remaining under its board authorization. The partnership’s total repurchase target amounts to approximately 3.1% of its current market capitalization.

Looking Ahead

Energy watchdogs have made it quite clear that global demand for oil and gas is not going to fall anytime soon. This should probably put a floor beneath prices going forward. Based on improving 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.


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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
 
Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
 
Magellan Midstream Partners, L.P. (MMP) : Free Stock Analysis Report
 
Western Midstream Partners, LP (WES) : Free Stock Analysis Report
 
MPLX LP (MPLX) : Free Stock Analysis Report
 
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