rAt the start of this year, major tech companies announced jaw-dropping capex budgets as the race for AI dominance accelerates. Amazon plans to spend $105 billion, while Alphabet and Meta plan $75 billion and $65 billion respectively, each representing over 15% growth from prior years.

I remember discussing with a friend what this could mean for data center buildouts, natural gas demand, and battery storage. Thanks to massive free cash flow, big tech typically funds capex with cash, which explains the rising budgets even amid high interest rates.

In midstream energy, however, the story is different. Here, maintenance capex is significant, and it's important to distinguish it from growth capex.

Take Energy Transfer (ET) as an example: they project about $5 billion in growth capex for 2025, significantly above the $3 billion earmarked last year, aligned with a bullish outlook for natural gas.

However, unlike tech companies, ET and most midstream players will likely fund a large part of this growth through debt. Given the higher cost of debt today, I question whether actual capex spending will ultimately come in below guidance.

So how should midstream CFOs approach capital allocation in today’s environment of high rates and a soft economic outlook?

My view is that the starting point must be their strategic objective, their true north. While each company is different, from the outside looking in it seems to me that the broad goal across midstream has been scale, gaining market share, often via M&A.

Sources of Capital available

Ways to Allocate Capital

Historically, midstream companies have leaned heavily on debt and cashflow to fund operations. To oversimplify, debt-funded M&A, cash flow–funded dividends.

Today, however, things are shifting. Cashflows remain robust, thanks to long-term contracts with take-or-pay clauses, strong demand, and a favorable regulatory environment. Debt, however, is now more expensive, reducing its attractiveness as a source of funding. If debt raises are limited, due to higher interest, then operating cashflow becomes the dominant source of capital. With that reality, my view is that CFOs should prioritize the following:

Strengthen Financial Health

Pay down debt to lower interest burdens and improve resilience against future downturns. This is especially important now, after a long period of borrowing at low interest rates. The last time rates were this high was in 2007, this level could be the new normal, who knows. Reducing leverage creates more strategic flexibility when opportunities arise.

Build a Liquidity Reserve

Maintain a healthy cash balance, this buys time and optionality. Stress-test 13-week cash flow models, recognizing that negative outcomes can be compounding and intertwined.

Pursue Growth Selectively

Fund high-ROI internal projects and bolt-on acquisitions from cash flow once debt and liquidity are at prudent levels. Explore M&A opportunities and strategic internal investments. R&D investments (automation, leak detection, emissions monitoring, and AI-driven logistics.), while riskier, could create future optionality if pursued thoughtfully.

Return Capital to Shareholders

Typical midstream investors are those seeking predictable, inflation-protected cashflows. As such, consistent dividends and opportunistic buybacks remain important.

Final Thoughts

All allocation decisions should be evaluated collectively, not in silos, because they are interconnected and must serve the broader strategic objective.

Execution is just as important as planning. While I recommend prioritizing debt reduction first, followed by liquidity building, then growth investments, and finally shareholder returns, this is not a rigid sequence.

Zero debt is rarely optimal for an asset-heavy midstream business. Instead, it’s about maintaining the right balance, managing leverage prudently, while staying positioned for growth.

In this new environment, midstream companies that stay disciplined in capital allocation will be the ones that thrive, and ultimately, command a premium valuation.