Fees drive Energy Transfer Partners’ (ETP) solid performance
Energy Transfer Partners (ETP) should be on your investment radar (Part 3 of 17)
Energy Transfer Partners’ performance in perspective
In the previous part of this series, we compared Energy Transfer Partners’ (ETP) performance in the stock market over the last six months to some of its benchmarks in the energy complex.
During this period, ETP was up ~13% even as crude oil prices more than halved, and the Alerian MLP ETF (AMLP)—an ETF of the top 25 MLPs in America—lost ~7%.
ETP is AMLP’s third-largest holding, and it accounts for just under 8% of the fund. Its largest holding—Enterprise Product Partners (EPD)—lost ~7%. Plains All American Pipeline (PAA)—its second-largest holding—lost ~12%. Meanwhile, the fund’s fourth-largest holding—Magellan Midstream Partners (MMP)—lost ~4% during the same timeframe.
So what’s behind Energy Transfer Partners’ solid performance?
A different business model
Midstream companies operate in a part of the energy complex that has a diverse but markedly different type of exposure to energy prices.
Upstream, or oil and gas production, and oilfield services & equipment companies’ profits are directly driven by energy prices. Downstream, or refining companies’, profits are driven by the difference in prices of refined products and the cost of crude oil.
Midstream companies gather, process, store, and transport various petroleum products. Their earnings depend on the way they choose to charge customers for their services. This can vary from basic fixed fees, irrespective of the volumes or prices of products actually handled, to the prices and volumes of the products being handled. The former is good for companies when energy prices fall, while the latter is good for companies when energy prices rise. Given Energy Transfer Partners’ rock-steady performance in the face of the recent rout in energy prices, we should easily be able to identify the company among the former category.
Indeed, the high fee-based component of the company’s earnings is clear in the snapshot of the company’s contracts in the image above.
Plus, the company also assures us that any remaining commodity price exposure it has is hedged away to a great extent.
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