tiprankstipranks
Energy Transfer: Positive Developments, Attractive Valuation
Stock Analysis & Ideas

Energy Transfer: Positive Developments, Attractive Valuation

Energy Transfer (ET) operates in the storage and transportation of natural gas fields across and within state lines.

Mainly, Energy Transfer runs a “toll booth” in the energy transportation space, which enables the company to achieve relatively consistent and predictable cash flows compared to most of its industry peers.

Environmental policies lean towards natural gas over fossil fuels since it is regarded as a more environmentally friendly fuel. Hence, Energy Transfer’s medium- to long-term prospects remain healthy.

However, note that Energy Transfer is not unsusceptible to damaging environments in the energy sector. We saw the company experiencing such hurdles during the COVID-19 pandemic, which adversely impacted its operations in 2020, even resulting in the company’s well-appreciated dividend getting cut.

Over the past year, the company has been recording positive developments, while in late January, the company further hiked its distribution per unit to an annualized rate of $0.70. This implies a yield of around 7.1% at the stock’s current levels, making for a strong, tangible catalyst for a potentially growing investor interest in the stock.

Overall, 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.

Recent Developments

Following the company’s pleasing latest results announcement, there are two positive developments worth noting.

Firstly, Energy Transfer completed the acquisition of the previously publicly-traded Enable Midstream Partners. Following the acquisition, Energy Transfer now operates more than 114,000 miles of pipelines across 41 states, further strengthening its prominent position in the midstream sector.

However, the most important reason that the acquisition is truly cheerful is the efficiencies and synergies to be unlocked. The acquisition is instantly accretive to Energy Transfer and even boosts Energy Transfer’s deleveraging efforts. It also provides Energy Transfer with a higher portion of fee-based cash flows from Enable’s existing, fixed-fee contracts.

The transaction is estimated to render annual run-rate cost and efficiency synergies north of $100 million, and that excludes any potential financial and commercial synergies.

As I mentioned earlier, the second positive development is the company’s dividend hike. This is quite important news as it reinforces Energy Transfer’s capital return growth prospects.

Based on Energy Transfer’s performance over the first nine months of 2021, the company should be able to produce distributable cash flow per share north of $2, comfortably covering the $0.70 annual dividend per share rate while retaining lots of room for further distribution hikes or external investments.

Energy Transfer’s upcoming earnings later in February should provide more info on the recent acquisition and the company’s plans to create unitholder value moving forward.

Wall Street’s Take

Turning to Wall Street, Energy Transfer has a Strong Buy consensus rating, based on six Buys assigned in the past three months. At $13.50, the average Energy Transfer stock prediction implies 32.4% upside potential.

Conclusion

In my view, Energy Transfer owns some of the highest-quality midstream assets in the industry. Its recent acquisition of Enable promises robust improvements in its financials, while the 15% dividend hike is in line with management’s past promises of growing capital returns. With units remaining reasonably valued, I continue to be bullish on Energy Transfer.

Download the TipRanks mobile app now

​To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles