Energy Transfer LP (ET) is one of the largest and most successful pipeline companies in the US. With its massive footprint and cash flow to match, it is poised to turn around as the energy sector regains its foothold.
Here are 6 reasons to buy ET.
1. ET has a footprint that covers virtually all of the major oil and gas areas in the US
Its big footprint means it has multiple sources of income from some of the biggest oil companies in the world.
From the Atlantic coast to the Gulf coast to N. Dakota to Arizona to Washington and Idaho and Canada, ET’s geographic diversity means diversity of revenue.
2. ET’s Q1 EBITDA was actually higher than Q4 2019
ET generates prodigious cash flow, EBITDA and has a 2020 Q1 distribution coverage of 1.72x. This means even if revenue drops, there is a huge cushion for maintaining the distribution. In addition, cuts in CAPEX would add even more cash flow and support the current distribution.
Note that Q1 EBITDA of $2.64 billion without the non-cash inventory adjustment was actually higher than 2019 Q4 EBITDA of $2.8 billion.
3. ET has diversified sources for most of its revenue
This means there will be substantial revenue even if oil production slumps going forward.
4. Insiders are buying big-time
Note that founder and CEO Kelcy Warren purchased 13.5 million units from November 2018 to November 2019.
And, just recently, in February, he added another 3.6 million shares.
Energy Transfer Chairman and CEO Kelcy Warren paid $45.2M on Feb. 19 for 3.6M publicly traded units at an average price of $12.53, lifting his overall ownership to 255.6M units.”
Source: Seeking Alpha
5. The stock price is near 5-year all-time lows
On March 30, 2020, the share price dropped to $4.53, the lowest level in over 4 years. On February 8, 2016, the price was a little lower than that at $4.05. The all-time high was $35.24 on June 15, 2015.
This indicates that the potential upside is huge.
6. At $.305 per quarter, ET is paying a 16% plus distribution
There is no indication from management that this will be cut in the near future and it currently is more than adequately covered by cash flow (1.72x) but if oil continues to drop in both price and volume, it may cut the distribution in spite of substantial cash flow. But as of now, that does not seem to be the case.
Conclusion
Energy Transfer is selling at a very compelling price. However, in this market environment, it could still go down from here.
On the other hand, management seems to be confident things are getting better. Here is a comment from the latest earnings call.
Marshall McCrea President: So as we look at that as an example and as we look through all of our assets in all of our segments, we see that things have bottomed out in our opinion and that things are improving and they’re going to grow.
I agree with management and think ET is a buy under $7 with a price target of $10 or higher within 1 year. If ET gets to $10 before then it may be wise to consider taking profits. In any case, keep a fairly tight stop-loss just in case things get worse.
Risks, alarm bells and red flags
With the vagaries of oil prices, any company associated with the quote “oil market” is subject to volatile price movements as can be seen in the price chart above.
In addition, there could be a recession coming or even a depression according to several economists.
“Economic data in the near future will be not just bad, but unrecognizable,” Credit Suisse economists led by James Sweeney wrote last week. “Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold… There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”
Keep in mind Limited Partnerships like ET can have tax complications. You will receive a Schedule K-1 not a 1099-DIV at tax time.
For more detailed information on taxes and other MLP issues see this from Investopedia.
Master Limited Partnership – MLP
ET is only suitable for investors with a tolerance for high-risk investments.
If you do not have a tolerance for high-risk investments don’t buy it.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
