I am bullish on Energy Transfer (ET) as the company’s incredibly cheap valuation, unanimous backing from Wall Street analysts, and improved forward prospects for dividend growth and buybacks make it appear to be a good time to add units.
Energy Transfer is one of the largest midstream energy partnership companies in the United States. Its mission is to safely transport energy commodities across the country as well as export them to foreign markets. It was founded by Ray Davis and Kelcy Warren in 1995. (See Analysts’ Top Stocks on TipRanks)
Strengths
Energy Transfer is one of the most diversified energy supply businesses in the United States.
The company has grown its asset base significantly over the years, spreading to more than 86,000 miles of natural gas, NGL, crude oil and refined products pipelines today.
Recent Results
Energy Transfer reported Q3 2021 net income of $635 million attributable to its partners, showing an increase of $1.29 billion relative to the third quarter of 2020. For the quarter, basic and diluted net income per limited partner unit was $0.20. The company also posted adjusted EBITDA of $2.58 billion compared to $2.87 billion in the same quarter of the previous year.
Each of the partnership’s various segments generate a meaningful percentage of Energy Transfer’s total revenue, resulting in a highly balanced earnings profile with no segment generating over 30% of the partnership’s consolidated adjusted EBITDA.
Energy Transfer’s Q3 2020 was notable for profiting $300 million from various optimization activities. That said, these one-time items and gains did not occur again in the third quarter of 2021, leading to weaker performance year-over-year. In Q3 2021, the partnership was able to reduce its outstanding debt by $800 million, using cash from operations, and was also able to reduce its long-term debt by $6 billion on a year-to-date basis.
The partnership also spent approximately $362 million on growth capital expenditures. For the full fiscal year, Energy Transfer expects its adjusted EBITDA to grow to a range of $12.9 billion to $13.3 billion, and its growth capital expenditure to amount to $1.6 billion.
Valuation Metrics
Energy Transfer’s stock looks extremely attractively priced right now with an EV/EBITDA multiple of just 7.1x that compares very favorably to its five-year average EV/EBITDA multiple of 9.7x.
Furthermore, the dividend yield is a very attractive 7.6% and the price to 2022 expected distributable cash flow is an incredibly low 4.5x.
Wall Street’s Take
From Wall Street analysts, Energy Transfer earns a Strong Buy analyst consensus based on five Buy ratings. The average Energy Transfer price target of $14.20 puts the upside potential at a whopping 72.2%.
Summary and Conclusions
Energy Transfer is a deeply undervalued and well diversified midstream infrastructure business. The stock has suffered due to extremely aggressive acquisition habits from management that have backfired more often than not, and eventually led to the dividend getting cut in 2020. As a result, investors have lost confidence in management and assign the stock a low valuation multiple.
That said, Wall Street analysts are unanimously bullish on the stock here, and management seems to be charting a better course that involves paying down debt aggressively and positioning the company to grow the dividend moving forward.
Disclosure: At the time of publication, Samuel Smith had a long position in ET.
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