Summary

• MLPs have made significant changes for the better over the last decade, including reducing leverage, eliminating burdensome incentive distribution rights, and focusing on sustainable distribution growth.
• Widespread free cash flow generation among MLPs has supported distribution growth and opportunistic buybacks.
• Despite drastic improvements over the last decade, MLP EV/EBITDA multiples remain below long-term averages.

Many investors may be considering MLPs for the first time ever or the first time in many years given a reestablished track record for strong performance and steady distribution growth. Interest in midstream/MLPs has seemingly strengthened following the election. Today’s note is geared toward investors that may not be aware of the significant positive changes that have taken place over the last several years, including free cash flow generation, improved balance sheets, and equity buybacks. For new or returning investors, our MLP Primer may also prove a helpful resource.

Hefty Spending Replaced by Free Cash Flow Tailwinds

Investors may be surprised by how much MLPs have outperformed the S&P 500 in recent years. From the end of 2020 until December 10, 2024, the Alerian MLP Infrastructure Index (AMZI) has generated a total return of 194.4% compared to 70.6% for the S&P 500.

One of the major tailwinds for energy infrastructure MLPs since 2020 has been widespread free cash flow generation (read more). MLPs invested heavily in new infrastructure during the 2010s as US energy production boomed, building major pipelines with billion-dollar price tags and often issuing equity to help fund growth. Self-funding equity capital started to gain more traction in the MLP space in 2017-18, and equity issuances became less common. In 2020, the combination of reduced growth capital spending and new cash flows from completed projects drove a free cash flow inflection. Rather than issuing equity, MLPs began repurchasing equity.

In recent years, moderate US oil and natural gas production growth has required less infrastructure. Instead of building new projects, companies have often been able to expand existing assets like pipelines or export terminals resulting in more capital-efficient growth. This has helped keep capital spending in check, supporting free cash flow. According to Bloomberg, AMZI’s free cash flow yield as of December 13 is 8.2% compared to 2.7% for the S&P 500.

High Leverage Replaced by Balance Sheet Strength

In the 2010s, hefty growth capital spending resulted in elevated leverage. A decade ago, it was common for MLPs to have leverage around 5x on a net-debt-to-adjusted-EBITDA basis. In addition to large capital budgets and debt loads, MLPs were also burdened by incentive distribution rights or IDRs (i.e. payments made to general partners as distributions to limited partners increased). As oil prices weakened from 2H14 to 1H16, MLPs struggled to raise equity. With many MLPs overextended and capital markets challenged, once-sacred distributions were cut, particularly by smaller MLPs. It was a painful period for MLP investors – many of whom exited the space.

MLPs learned valuable lessons from past challenges. Today, MLPs have already used excess cash to reduce debt and lower leverage. Most MLPs are targeting leverage at or below 4x, even as low as 3x (read more). Today’s stronger balance sheets can also add confidence to MLP payouts. IDRs have largely been eliminated. Only two names representing less than 15% of AMZI by weighting still have IDRs.

Reestablished Track Record of Distribution Growth Complemented by Buybacks

With balance sheets already improved, MLPs have used excess cash flow for distribution growth and opportunistic buybacks. Over 90% of AMZI by weighting has grown its distribution within the last year, and there has not been a cut to a regular distribution for an AMZI constituent since July 2021 (read more). Instead of focusing on growth at all costs, MLPs have prioritized sustainable distribution growth. Investors can have greater confidence in payouts today. As of December 13, AMZI was yielding 7.0%, which is particularly attractive as interest rates fall (read more).

While distribution growth has been the priority, MLPs have also been active with buybacks in recent years, albeit repurchases tend to vary (read more). Over 70% of AMZI by weighting has a buyback authorization in place as of December 10. Buybacks are a particularly strong example of how the space has changed given frequent equity issuances prior to 2015.

Despite Improvements, MLP Valuations Still Discounted

By all accounts, master limited partnerships are arguably in a much better position today than they were a decade ago. MLPs are generating free cash flow, growing distributions, and opportunistically repurchasing equity. Companies have simplified their structures, and balance sheets are stronger. The investment case is arguably as strong as it’s ever been.

Despite these drastic improvements, MLP valuations remain subdued. As of December 10, AMZI was trading at a weighted average EV/EBITDA multiple of 9.1x based on 2025 estimates or just 8.7x using 2026 consensus estimates from Bloomberg. The three-year average forward EV/EBITDA multiple is 8.8x, and the ten-year average is 9.9x. Even with strong performance in recent years, MLPs have not become expensive, and multiple expansion has not really materialized. This could be attributed to the niche nature of MLPs, their exclusion from broad market indexes, or perceived hindrances to directly owning MLPs, namely the Schedule K-1 issued for taxes. To be clear, investors can access MLPs through exchange-traded products, mutual funds, and other vehicles to receive a Form 1099 (read more).

Bottom Line:
Investors revisiting MLPs should be aware of the broad improvements made by companies in recent years. MLPs represent a compelling investment opportunity given free cash flow generation and attractive yields, which are enhanced by ongoing distribution growth. Even with these improvements and strong performance, MLPs have not become expensive relative to history.

AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB).

Related research:

Making the Case for MLPs With AMZ
Looking for Income as Rates Fall? Try Midstream/MLPs
3Q24: Another Strong Quarter for Midstream/MLP Payouts
Midstream/MLP 3Q24 Buybacks: Familiar Names Lead
Midstream/MLPs See Sustained Free Cash Flow
ETFs, CEFs & More: MLP Investment Products Evolve

For more news, information, and analysis, visit the Energy Infrastructure Channel. 

VettaFi LLC (“VettaFi”) is the index provider for AMLP and MLPB, for which it receives an index licensing fee. However, AMLP and MLPB are not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing or trading of AMLP and MLPB.