How Energy Companies Are Embracing the Subscription Model
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.
The index which underlies the SUBS ETF uses artificial intelligence (AI) to identify sectors and companies within those sectors that offer subscription services. As a result, energy companies are included in the SUBS portfolio.
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.
The Fount Subscription Economy ETF (SUBS)
The Fount Subscription Economy ETF (SUBS) seeks to provide investment results that, before fees and expenses, generally correspond to the total return performance of the Fount Subscription
Economy Index. The Index was designed to measure the performance of companies engaged in the business of providing subscription services, i.e., companies that sell products or services for recurring subscription revenue.
SUBS may present an attractive vehicle for individuals to gain exposure to companies offering subscription-based pricing models.
For a full list of SUBS holdings, please click here.
Holdings subject to change.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 855-425-7426 or visit our website at www.fountetfs.com. Read the prospectus or summary prospectus carefully before investing.
Exchange Traded Concepts, LLC. serves as the investment advisor to the Funds. The Funds are distributed by SEI Investments Distribution Co., (SIDCO) 1 Freedom Valley Drive, Oaks, PA 19456. SIDCO is not affiliated with Exchange Traded Concepts, LLC. or Fount Investment Co. Ltd.
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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.
The Funds’ concentration in an industry or sector can increase the impact of, and potential losses associated with, the risks from investing in those industries/sectors. For MTVR, the Fund may be concentrated in the entertainment and interactive media & services industries. The entertainment industry is highly competitive and relies on consumer spending and the availability of disposable income for success, which may cause the prices of the securities of companies to fluctuate widely. The prices of the securities of companies in the interactive media & services industry are closely tied to the overall economy's performance. Changes in general economic growth, consumer confidence, and consumer spending may affect them. MTVR may also be subject to the specific risks associated with metaverse companies. These risks include but are not limited to small or limited markets, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation. Smaller, start-up companies tend to be more volatile than securities of companies that do not rely heavily on technology. Metaverse Companies may rely on a combination of patents, copyrights, trademarks, and trade secret laws to establish and protect their proprietary rights. There can be no assurance that these steps will be adequate to prevent the misappropriation of their technology or that competitors will not develop technologies that are equivalent or superior to such companies’ technology.
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