To understand midstream’s defensiveness during periods of volatile commodity prices, it’s important to examine the fee-based business models.
Midstream has remained defensive and has held up better than broader energy amid weakening oil prices in recent weeks. West Texas Intermediate (WTI) crude, the U.S. benchmark, has dropped 16.9% from its high on January 15 through March 13. Meanwhile, the midstream segment, represented by the Alerian Midstream Energy Select Index (AMEI), has given up just 3.7% on a total-return basis.
Midstream is unique within energy for its fee-based businesses, which provide visibility to future cash flows. The segment provides services for fees under long-term contracts, resulting in stable and predictable cash flows.
This model sets it apart from other energy subsectors whose profits depend on volatile commodity prices. That means, unlike other energy subsectors, midstream may be able to generate steady free cash flow through different commodity price backdrops.
See more: Examining Midstream EBITDA Guidance for 2025 and Beyond
Upwards of 90% of large energy infrastructure corporations’ EBITDA is often fee-based, regulated, or covered by take-or-pay provisions, which means the customer has to pay regardless of how much they ship in a pipeline, according to Stacey Morris, VettaFi head of energy research.
Examining Fee-Based EBITDA for Midstream Companies in ENFR
Looking at a few examples from the Alerian Midstream Energy Select Index (AMEI), three stand out for percentage of fee-based EBITDA: Enbridge (ENB), ONEOK (OKE), and Targa Resources (TRGP).
Investors can access AMEI, a composite of North American midstream energy infrastructure companies, with the Alerian Energy Infrastructure ETF (ENFR ). ENFR is the lowest-cost energy infrastructure ETF available to investors.
Enbridge, a top three holding by weight as of March 13, has 98% cost of service, or contracted, cash flows. Additionally, over 95% of its customers are investment grade.
ONEOK expects 2025 earnings for its four segments to be around 90% to 95% fee-based, depending on the segment.
Finally, Targa expects 90%+ of its estimated 2025 adjusted operating margin to be fee-based.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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