Top Midstream Companies Based on the Correlation with Crude Oil

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Top Midstream Companies Based on the Correlation with Crude Oil PART 1 OF 8

Midstream Companies: Highest Correlation with Crude Oil

Crude oil off three-year highs

US crude oil prices were trading close to their three-year highs at the end January and beginning of February. However, they have come off their three-year highs due to the massive correction. WTI (West Texas Intermediate) crude oil has lost 4.5% since the beginning of this month. The recent decline in crude oil prices has mainly been driven by a steep rise in US crude oil inventories, strong supply growth, and a strong dollar. For a recent update and US crude oil’s outlook, read Crude Oil Prices Are near 2018 Lows

Midstream Companies: Highest Correlation with Crude Oil

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Midstream companies versus crude oil

Midstream companies usually don’t have direct exposure to crude oil due to their fee-based businesses. A few of the midstream activities, including natural gas processing and commodities marketing, have direct crude oil exposure. Midstream companies involved in the natural gas processing business have direct exposure to NGLs (natural gas liquids) and natural gas prices under different types of contracts. NGLs prices are linked to crude oil prices. There are broadly three types of natural gas processing contracts—fee-based, percentage of proceeds, and keep whole contracts. For details on these contracts, read Natural gas processing contracts and how they affect profits and valuation.

In this series, we’ll look at the top seven midstream companies (including C corporations and limited partnerships) that have the highest correlation with crude oil amid the strong gains in crude oil prices. The top seven midstream companies are:

  1. Targa Resources (TRGP)
  2. ONEOK (OKE)
  3. Williams Companies (WMB)
  4. Hi-Crush Partners (HCLP)
  5. EnLink Midstream LLC (ENLC)
  6. DCP Midstream (DCP)
  7. Crestwood Equity Partners (CEQP)

We’ll discuss their respective correlation with crude oil and their crude oil exposure throughout the series.

AMLP versus crude oil

The Alerian MLP ETF (AMLP), which is comprised of 25 energy MLPs, has a strong correlation with crude oil. AMLP’s one-year correlation with crude oil was 0.42 as of February 7, 2018. Among AMLP’s constituents, DCP Midstream has the highest correlation with crude oil, while Rice Midstream Partners (RMP) has the lowest correlation.

Next, we’ll discuss the correlation between Targa Resources and crude oil.


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