3 Midstream Stocks Positioned to Withstand Energy Price Swings

The overall energy sector is highly vulnerable to crude price volatility as prices of crude oil and refined products are driven by factors largely outside their control, including global supply-demand balances, OPEC+ production decisions, geopolitical tensions, weather events and macroeconomic conditions. Sharp movements in prices can materially affect earnings and profit margins, particularly for upstream players whose earnings are directly proportional to crude prices.

In contrast, the downstream sector's earnings are inversely proportional to crude prices, while integrated companies are naturally hedged against volatility due to their presence across the entire value chain, from production to refining. However, unlike most energy companies, Kinder Morgan, Inc. KMI, Enterprise Products Partners L.P. EPD and Enbridge Inc. ENB are not highly vulnerable to commodity prices.

Midstream Operations: Insulated From Commodity Price Swings

Due to the very nature of business, the midstream players’ revenues have limited exposure to crude price volatility. Midstream players generate stable and predictable cash flow amid commodity price volatility since the shipper’s book spaces in the pipeline network and storage assets on a long-term contract. Moreover, for some midstream players, shippers pay for spaces booked even though not utilized, thereby generating predictable cash flow.

3 Midstream Stocks to Gain: KMI, EPD, ENB

Kinder Morgan is the largest transporter of petroleum products in North America and owns approximately 79,000 miles of pipeline network, more than 700 Bcf of working natural gas storage capacity and 139 terminals. KMI generates stable fee-based revenues from take-or-pay contracts.

Enterprise Products, like KMI, also generates stable fee-based revenues from take-or-pay contracts, thus insulating its business model from crude price volatility. With over 50,000 miles of pipeline network, more than 300 million barrels of liquids storage facilities and other infrastructure, EPD can serve products and services to multiple markets.

Enbridge transports around 30% of oil and liquids that are produced in North America through its crude oil pipeline networks. ENB owns and operates natural gas pipelines, storage and processing facilities. ENB, like EPD and KMI, generates stable fee-based revenues by contracting spaces in its assets to shippers.

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This article originally published on Zacks Investment Research (zacks.com).

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