Slow but steady MLP/Midstream buyouts in 1Q23

• Eight constituents of the broad Alerian Midstream Energy Index (AMNA) spent a total of $780 million on share buybacks in 1Q23.
• Aggregate buybacks fell sequentially, with companies with an opportunistic approach being less active and some staying on the sidelines altogether.
• Nearly 76% of the constituents of the Alerian Midstream Energy Index (AMNA) by weighting currently have redemption authorizations in place.

Intermediate buyouts have been an important complement to dividend growth as companies return excess cash flow to investors. For 1Q23, total buyout spend was down significantly from levels seen in the last three quarters. Today’s note examines 1Q23 repurchases by company and some of the factors behind lower repurchase levels this quarter. Importantly, the 1% excise tax on redemptions does not appear to have played a role.

Intermediate buybacks fell in 1Q23.

Eight constituents of Alerian Midstream Energy Index (AMNA) collectively repurchased $780 million of their shares in 1Q23 (1). This marks a slowing down of the ~$1.4 billion spent on redemptions for each of the last three quarters. However, 1Q23 spending is more than double the $370 million used for buybacks in 1Q22.

Cheniere Energy (LNG) Again counted for the bulk of 1Q23 redemptions at $450 million, compared to over $700 million in 4Q22. Kinder Morgan (KMI) was the only other name to spend more than $100 million on buyouts during the quarter, after redeemed $113 million. Targa Resources (TRGP) redeemed $52 million in equity in 1Q23 and announced board approval of new $1 billion authorization.

The table below shows energy infrastructure companies with buyout authorizations in place, how much each has spent on buyouts, and each company’s weight in NAMA, Alerian MLP Infrastructure Index (AMZI), the Alerian Midstream Energy Select Index (AMEI), and the Algerian Midstream Energy Dividend Index (AEDW). Over 70% of indices by weighting have buyback permissions in place.

MLP buyouts slow as MPLX pauses.

Some of the largest MLPs have seen sequential declines in buyout spending. Magellan Channel Partners (MMPs) redeemed $64 million units in 1Q23, compared to $95 million in 4Q22. MMP’s generous redemptions and strong dividend track record will likely be missed by investors in the wake of its impending acquisition (Learn more).

Enterprise Product Partners (EPDs) stressed the opportunistic nature of its buyback program during its earnings call. EPD spent $17 million on buybacks in March as the banking crisis pressured energy stocks, including midstream (Learn more). Broad-based and short-lived weakness in MLPs/midstream from mid to late March provided a narrow window when buybacks could have been particularly attractive, although the midstream sector held up better than other sub-sectors Energy.

MPLX, which led the MLPs with almost $0.5 billion of share buybacks in 2022, did not carry out any buybacks in 1Q23. MPLX management expects distribution to be the primary means of returning capital to unitholders in 2023, as noted in the 1Q23 earnings call. Plains All American (PAA) also did not make any redemptions during the quarter.

Does the 1% excise tax on redemptions have an impact?

Recall that the Inflation Reduction Act provided for a 1% excise tax on share buybacks for corporations from January 1, 2023. Although this is the first quarter with the tax in instead, this does not appear to have played a role in the decline in buyout spending in 1Q23. It is important to note that the redemption tax does not apply to MLPs. LNG and KMI were clearly comfortable spending hundreds of millions of dollars on buyouts despite the tax, which is arguably negligible.

Conclusion

Buyout activity slowed in 1Q23, with companies with a more opportunistic approach generally being less active or staying on the sidelines. Cheniere (LNG) continues to drive the bulk of redemptions, having accounted for more than half of total redemption spend in 1Q23. Redemptions will fluctuate each quarter based on a variety of factors, including stock prices, but redemptions remain an important tool for returning cash to investors.

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

AMZI is the underlying index of the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMNA is the underlying index of the ETRACS Alerian Midstream Energy Index ETN (AMNA). AMEI is the underlying index of the Alerian Energy Infrastructure ETF (ENFR) and ALPS Alerian Energy Infrastructure Portfolio (ALEFX). AEDW is the underlying index of the Alerian Midstream Energy Dividend UCITS ETF (MMLP) and the ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND).

Related search:

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Intermediate investors can thank for 3Q22 redemptions

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(1) Total dollar amounts include Canadian dollars for Canadian companies with buyback programs.

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