Energy Transfer Doesn't Produce Any Oil. But, Here's How the War-Fueled 60%+ Surge in Crude Prices Should Benefit the High-Yielding Pipeline Stock.

Crude prices have skyrocketed this year due to the war with Iran. WTI, the primary U.S. oil price benchmark, has soared more than 60% to around $93 a barrel. Higher crude prices are enabling oil producers to generate an unexpected profit gusher this year.

Energy Transfer (NYSE: ET) doesn't produce a drop of oil. Despite that, the energy midstream company will benefit from this year's surge in crude prices. Here's how.

Image source: The Motley Fool.

Some upside to higher commodity prices

Energy Transfer operates a vast array of midstream energy infrastructure, including oil and gas pipelines, processing plants, storage terminals, and export facilities. Most of the company's assets operate under fee-based frameworks such as long-term contracts and government-regulated rate structures. Overall, about 90% of its earnings this year will be from fee-based sources. These arrangements help insulate its earnings from downside pricing volatility, though they do limit its upside potential to higher prices. The overall stability of its earnings enables Energy Transfer to pay a lucrative cash distribution (with a current yield of more than 7%).

While Energy Transfer has limited direct exposure to commodity prices, up to 10% of its earnings have some exposure to them. The earnings from crude oil-linked sources will be higher this year due to the surge in oil prices.

Higher volumes from SPR releases and exports

Most of Energy Transfer's assets operate under various fee-based arrangements. Some operate under take-or-pay contracts, in which the company earns a fixed fee for capacity regardless of whether the customer uses it. Others entitle the company to a fee based on the volumes it handles. Those volumes can fluctuate based on supply and demand. The higher the volumes flowing through an asset, the more fees it generates.

While Energy Transfer's overall volumes are fairly predictable, there is some variation due to market conditions. For example, the U.S. Department of Energy is releasing oil from the Strategic Petroleum Reserve (SPR) to help offset supply disruptions in the Middle East. This release will benefit Energy Transfer due to the proximity of its Nederland and Houston terminals to the SPR. For example, during the 2022 SPR release following Russia's invasion of Ukraine, Energy Transfer reported a 10% increase in oil transportation volumes and 14% uptick in terminal volumes in the third quarter of that year.

Relatively predictable with some upside potential

The overall predictability of Energy Transfers' earnings enables it to provide a narrow range for its annual financial guidance. For 2026, the master limited partnership (MLP) currently expects to generate $17.5 billion to $17.9 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That would be up about 10% from last year at the mid-point, driven largely by recently completed expansion projects and acquisitions at its affiliated MLPs. However, Energy Transfer's earnings will likely end up at or above the top end of that guidance range, driven by higher oil-linked earnings and volumes.

We saw this during the 2022 oil price surge. Initially, Energy Transfer expected to generate between $11.8 billion and $12.2 billion of adjusted EBITDA. However, it steadily increased its outlook throughout the year due to strong demand and higher commodity prices. It ended up generating nearly $13.1 billion in adjusted EBITDA, despite selling its Canadian midstream assets.

Cashing in on higher crude prices without producing any oil

Energy Transfer might not produce any oil, but it does have some upside to higher prices. It should generate higher earnings from assets with direct exposure to commodity prices and from higher volumes across its systems, especially at its oil terminals near the SPR. That positions the MLP to grow faster this year, which should give it the fuel to deliver high-octane total returns when combined with its lucrative cash distribution.

Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.