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How Energy Companies Are Embracing the Subscription Model

1 min read · 549 views Bong-Geun Choi Apr 20, 2023

Subscription pricing models have permeated almost every industry.  We often associate subscriptions with consumer products and services.  However, non-consumer-related sectors are also embracing the subscription model. One such is the energy sector, particularly mid-stream companies.  How are some energy companies utilizing subscription pricing structures?

 

Understanding the Energy Business

The energy sector is primarily composed of three segments:

  • Upstream – The upstream segment centers around the extraction of elements such as oil and gas.  This segment is also sometimes referred to as Exploration & Production (E&P)
  • Downstream – The downstream segment involves the refining and production of oil and gas.
  • Midstream – The midstream segment primarily refers to the distribution and transportation of oil, gas, and other energy-related products.

 

Companies involved in the energy sector often focus on one of these segments.  Some larger companies have operations that span several segments, most often upstream and downstream.  For example, large, integrated companies such as Exxon-Mobil extract and refine oil and gas. 

 

More often than not, companies in the midstream sector do not have operations that overlap upstream and downstream.

 

Subscription Pricing in Midstream

Midstream energy companies have historically utilized what can be defined as a subscription pricing model.

 

To facilitate their transportation and distribution, many midstream companies construct pipelines to carry oil and gas.  Both upstream and downstream companies may purchase a portion of the midstream company’s pipeline capacity to facilitate their need to receive or transport these elements.

 

Buyers of pipeline capacity often enter into multi-year contracts with a pipeline at federally mandated rates.  Pipelines offer either firm (guaranteed, but high-priced) or interruptible (lower-priced) service.  Shippers receive the right to transport an agreed daily quantity of gas.  These long-term contracts are often referred to as subscriptions, with the shippers paying a fixed monthly rate.  Shippers and midstream companies may enter into similar arrangements for storage.

 

Why Are There Energy Companies in SUBS?

As of 2/15/23, there were three energy companies in the Fount Subscription Economy ETF (SUBS).  These were midstream energy companies, primarily pipeline companies.  These companies often contract with both upstream and downstream energy companies to transport, store, and perform associated functions.

 

For example, Kinder Morgan specifically states that “storage contracts are subscribed under long-term arrangements …”  Others, while not explicitly using the word “subscription,” refer to long-term contracts with fixed payments.

 

Potential Benefits to Both Sides of the Subscription

Midstream companies may benefit from a steady, predictable revenue stream generated by the subscription.  Companies utilizing midstream capacity may also benefit from predictable expenses and access to the distribution and storage they need.

 


 

Bong-Geun Choi

Chief Economist

bchoi@fountinvestment.com

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Risk Disclosure:

 

Investing involves risk, including possible loss of principal. There is no guarantee the Funds will achieve their stated objectives. In addition to the normal risks associated with investing, international investments may involve the risk of capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or social, economic, or political instability in other nations. Emerging markets involve heightened risks related to the same factors, as well as increased volatility and lower trading volume. 

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