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Sunday, October 1, 2023

Energy Transfer: Looking Lively for Investors

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I am bullish on Energy Transfer (ET), as its excessively cheap valuation and attractive distribution make it appear to be a very attractive place to invest right now.

Energy Transfer is a blue-chip midstream company involved in natural gas and propane pipeline transportation. The company owns one of the largest and most diverse portfolios of energy assets in the United States.

Energy Transfer is a master limited partnership (MLP) with major operations, comprising natural gas, crude oil, and refined products, midstream and interstate and intrastate transport and storage. As one of the only midstream business that services all 15 major oil and gas producing regions of the U.S., Energy Transfer has achieved significant geographic diversification and scale advantages. (See Energy Transfer stock charts on TipRanks)


Energy Transfer’s asset portfolio features irreplaceable assets and geographic diversity. Its five core segments generated high and balanced earnings for the second quarter of 2020, preventing the company from being overly dependent on a single segment. Furthermore, Energy Transfer LP also owns Lake Charles LNG Company, 28.5 million common units of Sunoco LP (SUN) and 46.1 million common units of USA Compression Partners (USAC).

The company was also awarded the 2021 GPA Midstream Environmental Excellence Award, in June, for its patented natural gas compression systems that reduce carbon footprints.

Recent Results

Energy Transfer reported an adjusted EBITDA of $2.62 billion in the second quarter, which is an increase of $18 million, year-over-year. The Distributable Cash Flow for the second quarter of 2021 stood at $1.39 billion as compared with $1.27 billion for the second quarter of 2020. This increase was largely attributed to higher earnings from the company’s NGL and refined products, midstream and intrastate segments.

Energy Transfer also completed the expansion of its LPG facilities in Nederland in the second quarter, increasing its capacity to export 700,000 NGL barrels per day. Combined with the export capacity of its Marcus Hook terminal and Mariner West pipeline, Energy Transfer’s total NGL export capability has now reached over 1.1 million barrels per day, ranking it one of the largest in the world.

The company also reduced its outstanding debt by an estimated $1.5 billion, using the cash generated from its $900 million Series H preferred unit offering along with retained operational cash flow.

Despite its record of underperforming against competitors due to regulatory challenges like the Dakota Access Pipeline (DAPL), the most recent reports show promising growth and opportunities for Energy Transfer.

When combined with its highly-diversified and balanced business portfolio as well as record growth in NGL exports, brighter days may be ahead. However, keep in mind that the jury is still out for DAPL, and if it ends up being shut down, shareholders should prepare themselves to be disappointed.

Valuation Metrics

Energy Transfer stock looks very cheap at the moment. Its EV/EBITDA ratio is a mere 7.54x, which is the lowest among investment grade midstream businesses and its P/DCF ratio is also the lowest in the sector among investment grade midstream businesses at a mere 3.10x.

Wall Street’s Take

From Wall Street analysts, Energy Transfer earns a Strong Buy analyst consensus based on 4 Buy ratings, 0 Hold ratings, and 0 Sell ratings in the past 3 months. Additionally, the average Energy Transfer price target of $14.00 puts the upside potential at 53.85%.

Summary and Conclusions

Energy Transfer is very cheap by virtually every metric. Furthermore, its operational results and balance sheet have seen a strong recovery in the first half of 2021 and paint an optimistic future for the business and investors.

That said, the business has a checkered past with repeated cases of mismanagement destroying investor value. As a result, while it looks like it might be a good time to invest here, investors should be cautious about how much exposure they get to the stock.

Disclosure: On the date of publication, Samuel Smith had a long position in Energy Transfer.

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The post Energy Transfer: Looking Lively for Investors appeared first on TipRanks Financial Blog.

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