The performance of midstream last year didn’t align with the fundamentals. This is clear when you consider the periods either side (2024 and 2026YTD). Last year, the sector lagged and many investors became frustrated with the underperformance versus the S&P500, which really means versus the big AI hyperscalers.

In 2024 midstream investors grasped the need of data centers for more power, and how this would inevitably lead to increased natural gas demand since it’s cheap, reliable and abundant in the US.

Companies such as Williams (WMB) developed Behind The Meter (BTM) solutions under which a dedicated gas supply feeds a power plant that provides electricity to the data center. This avoids connecting through the grid and potentially driving up prices for all consumers, an issue that’s drawn much unwelcome attention recently.

Oddly, this positive sentiment didn’t persist into 2025 in spite of the AI story leading the overall market higher. Data centers still needed power and the role of gas-oriented midstream companies such as Energy Transfer (ET) and Kinder Morgan (KMI) in providing BTM solutions.

Not that many years ago, the big IT firms were sitting on enormous cash piles and faced pressure from investors to deploy or return it. The AI revolution has at least provided a use for some of that cash.

This year’s concerns about spending have caused sector rotation from growth to value. Midstream, along with energy stocks more broadly, has benefited. Over the past year or so, midstream performance has been driven by sentiment shifts leading to sector rotation more than changing fundamentals for the pipeline sector itself.

The result is that the correlation between the American Energy Infrastructure Index, representing the midstream sector, and the S&P500 has been falling over the past year, defined here using daily returns over the prior month. This year at times it’s been negative, and it’s fair to say that midstream and the stock market have no meaningful correlation.

Fundamentally, it shows that the concern about returns on AI-related capex doesn’t extend to the companies who will provide the natural gas infrastructure to power centers. Hyperscalers are expected to spend $450BN on AI capex this year. But BTM deals will typically require long term contracts that ensure an adequate return on the infrastructure, similar to the take-or-pay contracts commonly used for pipeline capacity.

It means midstream can act as a useful diversifier in a portfolio. The underlying fundamentals are strong, but in addition it’s not that exposed to the shifting sentiment among growth stock investors.

The low correlation with the market is less useful when overall returns are strong. But the tide is shifting as concerns grow about the scale of the hyperscalers’ capex plans.

Technology has been highly correlated with the S&P500, at above 0.8 for the past several months and often above 0.9. Energy along with the pipeline sector has generally not been correlated. This frustrated investors when tech stocks were hot, but it’s now turning out to be a more valuable feature.

For long term performance, the Targa Resources (TRGP) chart is quite a sight. My partner Henry and I have often debated the merits of this position. In late 2020 I flippantly called TRGP a “perennial misallocator of capital” (see Pipeline Buybacks and ESG Flexibility) as they initiated a buyback program with the stock price at $15 (Friday’s close was $231).

Former CEO Joe Bob Perkins frustrated many investors when he dismissed critics of their capex plans, saying their opportunities were really “capital blessings.”

Fortunately for our clients, Henry’s articulate defense of retaining our TRGP position was invariably convincing.

At the worst of the pandemic, TRGP lost 86% of its value from its previous high two years earlier. It subsequently rebounded to 38X that level. TRGP has developed a vertically integrated business in the Permian basin focused on natural gas and natural gas liquids (i.e. ethane and propane).

In early 2023 they acquired the remaining 25% of the Grand Prix NGL pipeline in Texas that they didn’t already own from Blackstone. Full ownership allowed them to improve their margins. Their stock is up 3.5X since then. Their quarterly dividend has grown from $0.35 to $1, although given the stock performance this still leaves it with paltry 1.8% yield.

But in recent years they’ve been buying back stock in similar amounts to their dividend payout. Last year they spent $755MM and the prior year $642MM. Distributable cash flow growth is solidly in the teens.

TRGP is quite a story.

Last week we had the opportunity to catch up with long-time friend and investor Dave Pasi and his charming wife Diane. At the risk of upsetting our friends up north, al fresco dining is thriving in Naples, FL. Dave was pushing his clients to add to their midstream positions last year, advice that looks especially good right now.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.