Energy Transfer: Buy The Stagnation

In an era of economic stagnation, where growth is constrained by geopolitical tensions, regulatory uncertainty, and the paradoxical demands of decarbonization and energy security, the search for resilient investments has never been more urgent. Among the most compelling candidates are midstream energy infrastructure companies. These firms, which transport, store, and process hydrocarbons, are increasingly undervalued despite their critical role in stabilizing energy markets and enabling the energy transition. This article argues that midstream infrastructure offers a rare combination of defensive qualities, attractive valuations, and long-term growth potential in a low-growth environment.

The Case for Midstream: Stability in a Volatile World

Midstream energy companies operate under fee-based business models, generating predictable cash flows that insulate them from the volatility of commodity prices. This structural advantage is particularly valuable in a macroeconomic climate defined by inflationary pressures and cyclical downturns. According to a report by Hennessy Funds, the Alerian US Midstream Energy Index surged by 50% in 2024, outpacing the S&P 500's 25% return, driven by rising natural gas demand for liquefied natural gas (LNG) exports and AI-driven power generationWhat’s Driving Midstream Company Performance? | Hennessy …^[3].

The sector's financial health further reinforces its appeal. As of 2024, midstream companies achieved a distribution coverage ratio of 1.88x and reduced debt-to-EBITDA ratios to 3.7x, enhancing their credit profiles and capacity for shareholder returnsWhat’s Driving Midstream Company Performance? | Hennessy …^[3]. These metrics contrast sharply with the broader energy sector, where upstream firms remain exposed to commodity price swings.

Valuation Metrics: A Discount to Historical Averages

Midstream energy infrastructure is trading at a significant discount relative to historical norms. Master limited partnerships (MLPs), a key subset of the sector, are valued at an enterprise value to 2025 EBITDA of 8.8x, below their 10-year average of 10.4xWhat’s Driving Midstream Company Performance? | Hennessy …^[3]. Similarly, midstream C-Corps trade at 11x EBITDA, slightly below their 10-year average of 11.7xWhat’s Driving Midstream Company Performance? | Hennessy …^[3]. These valuations are further supported by Q3 2025 data, which shows an average EV/EBITDA multiple of 9.2x for midstream companies, compared to 7.47x for the broader energy sectorEBITDA multiples by industry - FullRatio^[4].

The price-to-earnings (P/E) ratio also highlights undervaluation. The midstream sector's P/E of 14.93 in 2025 is lower than the energy sector's P/E of 16.14, suggesting that investors are paying less for earnings in midstream compared to peersWhat’s Driving Midstream Company Performance? | Hennessy …^[3]. For context, DT Midstream (DTM), a representative firm, trades at a P/E of 25.8 as of September 2025, far above its historical average of 17.2, indicating potential mispricing in the broader marketDT Midstream Historical PE Ratio^[2].

Regulatory Tailwinds and Strategic Positioning

The U.S. re-withdrawal from the Paris Agreement and the introduction of the executive order Unleashing American Energy signal a policy shift favoring traditional energy infrastructureInfrastructure in 2025: Megatrends and Mid-Market Opportunities^[1]. These developments are expected to accelerate permitting for LNG export facilities and expand access to federal lands for pipeline projects. For example, Kinder Morgan's Mississippi Crossing project and Cheniere's Corpus Christi Stage 3 expansion underscore the sector's role in global energy supply chainsInfrastructure in 2025: Megatrends and Mid-Market Opportunities^[1].

Simultaneously, the energy transition is creating new demand for midstream services. Natural gas, as a bridge fuel, remains essential for grid stability amid the integration of intermittent renewables. Data center growth, driven by AI adoption, is projected to increase U.S. power demand by 2.4% annually through 2030, with natural gas accounting for a significant share of this demandInfrastructure in 2025: Megatrends and Mid-Market Opportunities^[1]. Midstream companies are uniquely positioned to benefit from this trend, as they provide the infrastructure needed to transport gas to power plants and industrial hubs.

Risks and Mitigations

Critics may argue that midstream infrastructure is vulnerable to regulatory headwinds or a rapid shift to renewables. However, the sector's adaptability and long-term contracts mitigate these risks. For instance, many midstream firms are diversifying into hydrogen and carbon capture projects, aligning with decarbonization goals while maintaining fee-based revenue streamsInfrastructure in 2025: Megatrends and Mid-Market Opportunities^[1]. Additionally, the circular economy's rise—driven by the need to recycle materials and reduce landfill use—creates ancillary opportunities for midstream players in waste-to-energy and recycling infrastructureInfrastructure in 2025: Megatrends and Mid-Market Opportunities^[1].

Conclusion: A Defensive Play in a Stagnant World

In a low-growth environment, the mantra for investors should be “buy the stagnation.” Midstream energy infrastructure embodies this strategy, offering stable cash flows, attractive valuations, and a critical role in both traditional and transitional energy systems. With EV/EBITDA multiples below historical averages and P/E ratios that suggest undervaluation, the sector presents a compelling case for yield-focused investors. As geopolitical tensions persist and AI-driven demand reshapes energy markets, midstream companies are poised to outperform broader energy stocks—a defensive bet with long-term upside.