The Midstream Earnings/Valuation Paradox

The midstream energy sector has long been a source of both fascination and frustration for investors. On one hand, it boasts the structural advantages of fee-based cash flows, inelastic demand, and the critical role it plays in the energy transition. On the other, its valuation metrics have often seemed disconnected from its operational performance-a paradox that has only deepened in 2025. As the sector navigates a period of robust earnings growth and disciplined capital allocation, the question arises: Why do valuations remain stubbornly anchored to historical norms, even as fundamentals suggest a compelling case for re-rating?

Earnings Resilience in a High-Yield Sector

The midstream sector's earnings resilience in 2025 is undeniable. DT Midstream, for instance, reported adjusted EBITDA of $288 million in Q3 2025, a $11 million increase from Q2, driven by record Haynesville gathering volumes and the early completion of its LEAP Phase 4 expansion project. The company raised its full-year 2025 adjusted EBITDA guidance to $1.13 billion, reflecting an 18% annual increase, while simultaneously reducing growth capital spending to $385 million–$415 million, underscoring improved CAPEX efficiency. Similarly, Summit Midstream saw a 7.2% sequential rise in adjusted EBITDA to $65.5 million in Q3 2025, fueled by higher natural gas volumes in its Rockies segment.

These results are not isolated. The Alerian US Midstream Energy Index surged 19.16% in 2023, outperforming the S&P 500® Energy Index's -1.33% return. For 2024, analysts project continued strength, driven by rising production volumes of natural gas, crude oil, and LNG, as well as stable-to-rising energy prices. Midstream companies, with their integrated business models spanning gathering, processing, transportation, and exports, are uniquely positioned to benefit from these trends.

Valuation Dislocation: A Mispricing Opportunity?

Despite this earnings momentum, midstream valuations remain anchored to historical averages. As of year-end 2023, midstream C-Corps traded at 9.1x EBITDA, below their 5-year average of 10.1x, while MLPs traded at 8.3x EBITDA, slightly below their 5-year average of 8.5x. This dislocation persists even as distribution coverage ratios are forecasted to average 1.8–1.9x over the next five years, and sector-wide debt-to-EBITDA ratios have improved to 3.8x, reflecting reduced leverage and stronger balance sheets.

The disconnect is perhaps most striking in the case of Antero Midstream, whose valuation multiple has expanded from 14–15x earnings in 2022 to 19–21x in 2025, reflecting renewed investor confidence in its operational and financial discipline. Yet, broader sector multiples remain subdued, creating a paradox: Why are investors not pricing in the sector's improved capital efficiency and earnings visibility?

One explanation lies in the lingering shadow of past volatility. The midstream sector has historically been sensitive to commodity price swings and regulatory shifts, leading to periodic bouts of underperformance. However, 2025's results suggest a maturation of the sector. Companies like DT Midstream and Summit Midstream are demonstrating a newfound focus on capital discipline, with DT reducing its 2025 growth capital guidance by 18% and Summit prioritizing operational scalability through strategic well connects.

Capital Discipline: The New Normal

The shift toward capital discipline is perhaps the most significant development in the midstream sector. In Q3 2025, DT Midstream's early completion of the LEAP Phase 4 expansion-a $200 million project-highlighted its ability to deliver infrastructure at lower costs while enhancing throughput. Similarly, Summit Midstream's focus on connecting 50 wells in Q4 2025 and over 120 in early 2026 underscores its commitment to aligning CAPEX with customer demand.

This trend is not limited to individual companies. The sector as a whole is adopting a more measured approach to growth. Energy Transfer, for example, reported $3.84 billion in Q3 2025 EBITDA, down slightly from $3.96 billion in Q3 2024, but its management emphasized a strategic shift toward optimizing existing assets rather than pursuing speculative expansions. Such moves signal a sector-wide recalibration, prioritizing returns on invested capital over growth-at-all-costs.

The Path Forward: Re-Rating or Re-Risk?

The midstream sector's valuation paradox hinges on whether investors will eventually recognize the alignment of its earnings power with its improved capital efficiency. The global energy demand outlook, which emphasizes the critical role of midstream infrastructure in ensuring grid stability and facilitating the energy transition, provides a tailwind. Moreover, the sector's high-yield characteristics-distribution yields averaging 5–7%-make it an attractive alternative to bonds in a rising interest rate environment.

However, risks remain. Tidewater Midstream's Q3 2025 adjusted EBITDA of $16.2 million, down from $29.2 million in Q3 2024, highlights the vulnerability of certain midstream assets to commodity price fluctuations and margin compression. Similarly, Energy Transfer's Q3 2025 EBITDA decline, though modest, serves as a reminder that not all midstream companies are equally insulated from macroeconomic headwinds.

Conclusion: A Sector at a Crossroads

The midstream earnings/valuation paradox is, at its core, a question of timing. The sector's fundamentals-robust earnings, disciplined capital allocation, and a critical role in the energy transition-suggest a re-rating is overdue. Yet, historical volatility and regulatory uncertainties continue to weigh on valuations. For investors willing to look beyond short-term noise, the current dislocation offers an opportunity to access a sector that is increasingly aligned with long-term value creation.

As the energy landscape evolves, midstream companies that continue to prioritize operational efficiency and balance sheet strength will likely emerge as the sector's new benchmarks. The challenge for investors is to distinguish these disciplined operators from those still clinging to outdated growth models. In doing so, they may uncover a paradox that is, in fact, a powerful catalyst for outperformance.