I am bullish on Energy Transfer (ET) as its price target and valuation multiples imply significant upside and Wall Street analysts are unanimously bullish on it.
Energy Transfer is one of the most diversified and largest energy companies located in North America. Headquartered in Dallas, Texas, the company was founded in 1995, and has since built several associated energy infrastructures and over 114,000 miles of pipelines to support the transfer of oil and gas products in approximately 41 states.
The company also has controlling interests in several other companies, including 100% of Sunoco Logistics Partners Operations L.P., Sunoco L.P., and 100% of Lake Charles LNG. It owns and operates natural gas pipelines and focuses on all gathering, and transportation of natural gas liquids, natural gas, refined products, and crude oil.
Strengths
Energy Transfer operates in the oil and gas services industry and is known as one of the largest and most diversified assets in the United States of America.
As one of the most well-known brands in the country, it has also established a superior brand image and perspective in the market. Its vast network of pipelines gives it a competitive edge in the industry and its innovations and advancements have also proven to give it superiority over its competitors.
Additionally, the company also has several strategic assets that it can leverage to grow and expand further in the future.
Recent Results
According to the financial reports from the fiscal year that ended in December 2019, the company gained 100% ownership interest in five different companies, which increased its storage capacity and led to revenues totaling $54,213 million.
Although only a slight increase from the previous year’s revenues, the results are staggering compared to the revenues generated in 2017, 2016, and 2015.
The operating income in 2019 also grew by approximately 136%, compared to the 2018 results, taking the total to $7,277 million. The net income also increased by $1,534 million over the year, reaching $4,899 million in total.
Valuation Metrics
ET stock looks very undervalued here as it trades at a massive discount to historical averages on both an enterprise value-to-EBITDA ratio and price to free cash flow basis. Its enterprise value to EBITDA ratio is 7.8x compared to its historical average of 9.6x, and its price-to-free cash flow ratio is 6x compared to its historical average of 11.8x.
The dividend (also referred to as a “distribution”) is also extremely well covered by distributable cash flow and the yield is 6.3% right now, making it look very attractive by several measures.
Wall Street’s Take
According to Wall Street analysts, ET earns a Strong Buy analyst consensus based on six Buy ratings, zero Hold ratings, and zero Sell ratings in the past three months. Additionally, the average Energy Transfer price target of $13.50 puts the upside potential at 40.8%.
Summary and Conclusions
Energy Transfer is a leading American midstream infrastructure business and is currently gushing cash flow. The stock looks to be extremely undervalued, as reflected by the massive upside implied by analyst average price targets, the unanimous Wall Street analyst bullishness, and its steep discount to its historical valuation multiples.
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