Energy Transfer (ET) engages in natural gas operations, storage and transportation across and within state lines.
Essentially, Energy Transfer operates as a “toll booth” in the energy transportation space, which allows for relatively consistent and predictable cash flows compared to most companies in the sector.
With environmental policies favoring natural gas over fossil fuels — since it is considered a more environmentally friendly fuel — the company’s medium- to long-term prospects remain healthy.
That said, Energy Transfer is not immune to adverse environments in the energy sector, as was the case during the ongoing pandemic, which severely impacted its operations last year. It even led to Energy Transfer’s popular dividend getting cut.
Still, the company’s operations have recovered notably, with distributable cash flows currently covering the 7% yield quite well. Further, capital returns are likely to grow notably going forward.
As a result, I am bullish on the stock due to the company’s quality assets, robust capital returns, attractive valuation, and overall growing demand for natural gas. (See Analysts’ Top Stocks on TipRanks)
Recent Developments
Energy Transfer reported its Q3 results, delivering GAAP EPS of $0.20. While this was 30% weaker than consensus estimates, net income is a meaningless metric for a midstream company due to the high depreciation charges, which are a non-cash item. It is, therefore, better to focus on Energy Transfer’s EBITDA and distributable cash flows.
Adjusted EBITDA came in at $2.6 billion, $300 million lower compared to last year. However, this was attributed to one-time items in Q3 2020. What was rather cloudy nonetheless was that management was somewhat obscure about these one-off benefits last year.
Distributable cash flows were $1.31 billion, a decline of $380 million year-over-year, affected by the aforementioned $300 million in extraordinary positive items in Q3 2020. Still, at $1.3 billion/quarter, the company is generating quite a bit of cash. It makes for an annualized rate of around $5.2 billion or a distributable cash flow yield of 23.6% at Energy Transfer’s current market cap of $23 billion.
Based on Energy Transfer’s results over the first nine months of the year, the company should be able to generate distributable cash flow per share in excess of $2, comfortably covering the $0.61 annual DPS rate.
The current yield of around 7% is still quite tasty, while the decision to suspend distributions has also paid off meaningfully. Energy Transfer managed to deleverage substantially during the past year, reducing its long-term debt from $51.4 billion to $44.8 billion.
As a result, management now expects to begin returning more capital to shareholders through distributions and buybacks starting in 2022. In the meantime, paying down debt remains Energy Transfer’s top priory.
With the stock trading already a hefty yield, potential DPS hikes, and further capital returns through unit repurchases, Energy Transfer’s investment case has become quite compelling. Especially considering the stock is trading at a relatively cheap valuation at around 4.1x its distributable cash flows, with strong recovery potential in the energy sector going forward.
Wall Street’s Take
Turning to Wall Street, Energy Transfer has a Strong Buy consensus rating, based on five Buys assigned in the past three months. At $14.20, the average Energy Transfer price target implies 74% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
