Tallgrass Energy Partners LP (NYSE: TEP) stock hasn’t been a big mover this year. In fact, TEP stock is up only 1.6% year-to-date. But don’t let that cool your interest.
As a matter of fact, this should be viewed as a great time to buy this midstream U.S. energy company and latch onto its 7.8% dividend yield.
But before we dive into what makes TEP stock so appealing, I’d like to give you a quick review of the three “streams” in the energy patch.
Upstream: These are the exploration and production (E&P) companies that are drilling for oil, natural gas and natural gas liquids (NGLs). Sometimes they’re broadly described as the drillers. The price of oil or nat gas is crucial to their success.
Midstream: These are the companies that essentially ship the energy from the E&Ps to storage facilities to refineries. They are like tollbooth operators. They make their money shipping the commodities from Point A to Point B. The price of energy doesn’t matter to them as much as volume. The greater the demand, the busier they are and the more money they make in “tolls.”
Downstream: This is the storage and distribution from the refineries to the gas pumps or tank farms or, for NGLs, the manufacturers who use the products. This again is a market that functions off the price of the refined product and demand at the retail level.
In the current spot on the energy cycle, midstream is a great way to play it.
The Strength Behind TEP Stock
First, OPEC (primarily Saudi Arabia) is still trying to make it hard for U.S. shale producers to compete by manufacturing a sustainable price. In 2014, it tried to wipe out U.S. production to boost its exports, which lasted for a while. But now shale E&Ps are much more efficient and can be profitable at lower prices.
That’s a big plus for U.S. energy independence, and it also helps E&Ps grow their business in the U.S. without a lot of competition from overseas. And all this energy flows through midstream firms’ (like Tallgrass Energy) networks.