Policy uncertainty rattled markets in the first quarter of 2025 after OPEC announced plans to accelerate output in the coming months. While we acknowledge that threats to global demand abound, we believe that natural gas helps promote midstream resilience despite the cloudy macroeconomic outlook. Ongoing capital investment activity, dividend hikes, and intact earnings guidance all suggest continued momentum for midstream and offer a vote of confidence despite the market volatility that was observed in April. North American midstream should benefit from structural growth trends in 2025, allowing it to thrive even in the face of market uncertainty.
Key Takeaways
- Rising natural gas production supported midstream performance over the first quarter, even amid ongoing crude oil volatility.
- Master Limited Partnerships (MLPs) and energy infrastructure firms have deleveraged their balance sheets and raised distributions, providing a margin of safety in volatile markets.
- Structural tailwinds like coal-to-gas switching, rising overseas consumption, and energy infrastructure investments continue to support the outlook for natural gas.
Midstream to Benefit from Natural Gas Production Volumes
The first quarter of 2025 was difficult for the broader energy sector, given trade uncertainties and crude oil headwinds. However, sub-themes with strong natural gas exposure outperformed on a relative basis. Earnings across the oil & gas sector declined 12.7% over the quarter. At the sub-industry level, earnings declines were led by refining & marketing (-104%), integrated oil & gas firms (-13%), and equipment & services (-8%), all of which were vulnerable to crude-related headwinds, including weaker refining margins and a decline in demand for oilfield services.1
Two sub-industries stood out: midstream storage & transportation, which was relatively flat, reporting a 1% earnings decline, and upstream exploration and production, which delivered impressive 19% earnings growth.2 Natural gas has played a central role in this divergence. We saw a sharp rebound in natural gas prices over the first quarter—with prices expected to rise above $4.00 per MMBtu versus sub-$2.00 the prior year—driving production growth.3 Natural gas producers raised production even as spending on new drilling activity fell. We think this reflected efficiency gains and several DUC well completions (drilled-but-uncompleted) held in reserve from the previous year.4 Higher prices and positive sentiment surrounding the trajectory of global gas demand drove activity among several gas-heavy shales, including the Haynesville and Marcellus, which subsequently benefited midstream firms over the first quarter.
Looking ahead, we believe North American midstream is likely to continue benefiting from rising natural gas production volumes over the coming years, as throughputs grow and contract fees escalate. Increased processing volumes of natural gas liquids (NGLs) such as propane, butane, and ethane, alongside LNG terminal completions, are expected to support continued production growth in the United States. Over the past decade, U.S. NGL average daily production volumes rose by ~133% while annual LNG export volumes grew ~26,700%.5 Meanwhile, the EIA forecasts total U.S. dry natural gas production will continue hitting record levels, expected to reach 105 bcf/d in 2025 and 106 bcf/d in 2026, respectively.6
Midstream Characteristics May Help Buffer Against Market Headwinds
The North American midstream sector has historically demonstrated resilience during economic downturns. While demand disruptions remain a risk for the broader energy complex, midstream operators have historically benefited from the defensive characteristics that are rooted in stable contract terms and relatively inelastic demand.
Among midstream assets, long-haul transmission pipelines—regulated by the Federal Energy Regulatory Commission (FERC) for interstate assets and by state agencies for intrastate pipelines—generate the most stable cash flows. These pipelines are typically contracted under long-term, fixed-fee agreements with producers, often carrying minimum volume commitments or “take-or-pay” provisions that require payment regardless of actual throughput. This structure helps reduce both price and volumetric risk. Additionally, midstream operators retain the ability to periodically raise prices through inflation escalators, offering a level of inflation protection.
From a cost perspective, midstream operators have adopted capital discipline, opting to only construct new projects when fully contracted, and they self-fund many project expenditures. This conservative approach has helped reduce the need to issue additional debt or dilute equity. Leverage ratios remain healthy and credit metrics have improved from the decade prior, reinforcing distribution growth, fueling share buybacks, and providing a margin of safety in the event of a broader downturn. The debt/EBITDA of the Solactive MLP & Energy Infrastructure index (the “Midstream Index”) has fallen to 4.35, down from 5.6 on June 30, 2021 at the beginning of the post-COVID era, representing a 22.3% decline in leverage.7
At the same time, index-level distributions have grown by nearly 69.2%, with 12-month distributions per share rising to 12.91 from 7.63 over the timeframe. In our view, distribution growth, deleveraging, and heightened M&A activity have all been funded by the substantial rise in midstream cash flows since 2018 and beyond. The free cash flow per share for the Midstream Index has grown to nearly 14.39 as of the end of the 1st quarter, up from ~0.04 near index inception in December of 2018.8 This has been made possible by a combination of contract inflation escalators, maturing pipeline investments, and capital discipline when it comes to new outlays. Looking ahead, we believe the industry’s improved balance sheets and renewed focus on free cash flow will help it withstand near-term market volatility, even as emerging natural gas projects lay the groundwork for long-term growth.
Structural Growth Trends Continue to Drive Demand for Natural Gas
Despite tariffs and a weak crude oil backdrop, we think the investment thesis supporting U.S. natural gas remains attractive. Global consumption continues to rise, while U.S. energy exports rapidly scale to meet overseas demand. In fact, from 2013 to 2023, global natural gas consumption grew 1.7% annually and it is now projected to rise another 34% (cumulatively) by 2050.9 Even amid market swings in 2008 and 2020, global natural gas consumption has grown undeterred.
Much of this growth can be attributed to rising demand across emerging markets—particularly in China, India and the Middle East—where rising industrial activity and a burgeoning middle class are driving long-term power demand. Within the United States, natural gas consumption has shifted toward power generation, representing a more resilient source of demand. Meanwhile, structural growth themes such as grid expansions, energy security, and coal-to-gas switching further anchor natural gas in the global energy mix.
We believe it’s unlikely that natural gas consumption would decline meaningfully during an economic downturn, given the low-cost production base of U.S. natural gas and the essential role that it plays in meeting inelastic sources of demand like heating and power generation. Residential usage remains steady with nearly 70 million American homes relying on natural gas for heating and cooking, accounting for 14% of total U.S. natural gas consumption in 2023.10 Meanwhile, power generation has grown into the largest driver of natural gas demand, rising to 45% of all natural gas deliveries in 2023, up from 34% in 2013.11 In our view, this growth, combined with the cost advantage and widespread utility of natural gas, make it relatively demand-inelastic versus other fuels.
While natural gas has historically represented a localized commodity, owing to transportation constraints, it has become an increasingly global commodity thanks to advances in liquefaction technology and the proliferation of global LNG infrastructure. By compressing gas into a liquid roughly 600 times denser than its gaseous state, LNG enables safe and economical long-distance transport.12 This has allowed US firms to leverage low-cost domestic production against high-margin global demand, cementing the United States as the world’s largest LNG exporter in 2024.13
Upcoming LNG terminal expansions show little sign of abating, with the U.S. LNG industry expected to double its US economic footprint by 2040.14 This reflects major terminal completions, with Port Arthur, Rio Grande, and Commonwealth expected to come online or reach FID by the end of the decade to meet long-term offtake commitments from key trading partners. At the same time, the recent Chinese exemption of ethane imports from the U.S. underscores the lack of viable substitutes for these critical natural gas byproducts.15 As international buyers continue to increase reliance on U.S. energy exports, we believe the North American midstream sector continues to operate at the center of the global supply chain to meet global energy consumption.
Conclusion: Protection Against Price Volatility & Exposure to Growth Opportunities
We think midstream energy infrastructure continues to offer an attractive combination of defensive characteristics and growth opportunities, allowing it to operate relatively independently of many of the global demand fears impacting the broader energy sector. Crude oil throughputs on long-distance pipelines remain buoyed by long-term agreements that commit oil producers to minimum volume requirements, helping cushion the downside should production volumes fall. Meanwhile all signals indicate global demand for U.S. natural gas exports is likely to persist. As U.S. energy infrastructure continues to ramp up its investments to meet rising demand, we believe North American midstream will remain the critical link connecting domestic production with global consumption.