This is a DD I wrote for a discord I’m in with some friends.
Energy Transfer LP, ticker symbol ET, is an Energy Sector Master Limited Partnership, or MLP comprised of 13 companies currently, ET itself and 12 acquisitions it’s made over the years . A MLP is simply a publicly traded partnership. What this means is that instead of buying a share of the company and being just a voting shareholder, you pay to become a corporate partner and instead of dividends you are paid out in distributions which are basically the same thing with one difference, MLP are closer to REIT’s and BDC’s than individual stocks, and like those two assets that’s have to pass 90% of profits not used in upkeep of the business to shareholders, MLP’s have to pass on 100% of profits not reinvested into the business. Final note on MLP’s is that their distributions are taxed like REIT’s and BDC’s so if you have a tax advantaged account I would put ET there rather than a normal brokerage but it’s absolutely fine to have in a normal brokerage if that’s all you have. ET currently operates in the business of transporting oil, gas, natural gas, and liquid natural gas (LNG) from its source to energy companies that turn it into electricity or refine it or whatever. ET itself is only concerned about the transport or energy, almost like it’s in the name or something. As a result ET has been able to expand its business so much that it is responsible for the transport of 1/4 of all US produced natural gas and LNG, as well as 35% of all US produced crude oil. If you live in the southern US, your power ran though their pipes at some point. In addition to their energy transportation lines, which account for roughly 88% of revenue, ET owns a controlling stake in both Sunoco (34% of common stock shares owned by ET; which it uses to sell their gasoline directly to consumers through their gas stations throughout the US) and USA compression Partners LP (ET owns 48% of common stock shares). Their ownership/partnership of USA Compression Partners (USAC), which services/repairs oil and natural gas lines as well as updates them with modern tech and pipes (and is regarded as one of the top in the nation) , is why I’m especially bullish on ET as it allows them to exploit a loophole when it comes to making new pipelines that I will explain further into this discussion. Due to ET owning 48% of USAC, that means for every $1 that ET spends on USAC to fix their equipment, ET gets back $0.48. It’s for this reason that USAC accounts for approximately 6% of yearly revenue and since being acquired, has been a break even or positive investment for ET every single year. Sunoco also contributes approximately 6% of ET’s yearly revenue and that is expected to increase as gas prices go up under a Dem controlled senate, house, and WH. ET is also in the process of making two new acquisitions this year, and specifically, this quarter. First up is the completion and opening of their largest green/renewable energy project yet. A massive solar farm in west Texas that is expected to generate 28 MW at peak output (keep in mind 1 MW is enough to power 400-900 homes for a year). This farm was made with a partnership with Recurrent energy. The second expected acquisition is Enable Midstream Partners, a large competitor in the gulf coast area. Now for the more negative side of ET because I have to address the massive winter storm we just had and how it’s expected to effect ET. In short, if nothing changed at all this year after it was hit, ET would be looking at losing about 1/3 of yearly revenue according to their latest Earnings Report. However, according to their own management team in that same ER, if the solar farm in west Texas proceeds on schedule, opening in Q2 of this year, and if their scheduled acquisition of Enable Midstream Partners LLP, which happens to be Louisiana’s largest pipeline company and a large competitor in the gulf coast area, goes through as expected also in Q2 (the buy out is expected to be finalized between May 19th and July 1st) then the total fallout of the winter storm, including damages, lawsuits, and cost of modernization/upgrades is dramatically reduced to being only 1/4 of yearly *PROFITS* instead of pure revenue. This essentially makes it almost a non-existent problem when you look at it from the perspective of at least a year. And the best part is that since they said that in their ER, the stock price has already moved accordingly so now it’s basically on discount because people drove it down based on the short term news and not realizing that by the start of Q3, the damages will most likely already be paid off, allowing this stock to really take off. Finally, before I get into some of the basically financial fundamentals of ET and tell y’all where I think it’s going, I want to go over what I think are some of the more common concerns one might have about ET. These aren’t mine personally as you’ll soon see but they are some of the most common concerns of people on message boards and some analyses as well. The first problem I commonly see is that, due to Dems being in control, prices of oil and other natural gases will rise increasing the cost to produce them. While this is true, ET itself does not dig up or produce any gas or oil on its own, it is purely a midstream (or transportation and storage) energy company. This means that rather than buying the builder of the bridge, you are buying the company that tax’s people to use it. As a result, rising prices in my opinion are actually a good thing for ET, since they don’t charge a flat rate to transport materials, rather a % of the cost of the materials. So as the cost of oil goes up, so to does ET’s transport prices. The second common concern I see relates to the first one in that it’s also a result of Dems being in control. Typically under Dem administrations and congresses, new pipeline construction is pretty much put on a standstill cause they want to focus more on renewables and beefing up our green energy grid (something ET is also doing as previously discussed, they are close to 25% of all energy used being renewable). This means ET can’t build new pipelines and their growth plans are ruined right? Well not so fast because I still have to explain to you the biggest reason I’m buying ET, and that is their partnership/ownership of USAC. This simple company lets them exploit a loophole that none of the other pipeline companies are large enough to do. Instead of simply building new lines, they are able to buyout competitors that are older/need repairs at a discount, hire USAC to come in and replace all the pipes with brand new ones with the best technology, and since they are now owned by ET, those pipes have to be allowed to connect to ET’s main supply line, so it doesn’t have to worry about Dems blocking new pipelines since legally, it’s an old pipeline being refurbished and outfitted to connect to the main supply. I’m not sure how the connector isn’t counted as a new pipeline but I’ll just chalk that up to lobbying. And since they own 48% of USAC, they get back 48% of their payment, reducing costs. So while their competitors are unable to go to new mines as they are discovered, ET is able to just buy the local infrastructure that’s moving the product from the source, fully upgrade it, and simply attach it to its network. It’s because of this strategy that they have a network of lines that goes from New York, to Montana, down to Texas, Arizona, and Florida. They also just purchased a line in the northwest so expect that to be connected through the Montana pipeline in the near future. The final concern I see is their debt is huge. And while it is large, you have to remember it’s technically 13 (soon to be 14) companies all rolled into one. So it’s debt will seem a bit large for a single pipeline company, until you realize it’s 13 companies. Additionally as you’ll read in the financial fundamentals, they have a fairly average Debt/Equity ratio of only 2.83 and it’s competitors of similar size have D/E ratios in the range of 5-35. The final point I’ll make on ET’s debt is that the vast majority is long term debt which it acquired from its buying of companies. They have also made it a point that after the Enable Midstream acquisition, they intend to begin paying off their debt in droves so that they can look towards another round of aggressive acquisitions like it recently underwent which added the debt in the first place. All in all, I’m not concerned about the debt in general as I believe they are more than capable of handling it. Now finally the financial and fundamental break down of ET; its current price is $7.85 has a dividend yield of 7.99% which translates to roughly $0.61 per share paid out over 4 quarters with payments in Feb, May, Aug, and Nov. it’s currently paying out 84% of its yearly profits as dividends and it has a safe rating for its dividend payments. Analysis have a 1 year target price range for ET between $7.50 and $16 with an average price target of $10.84 suggesting room for solid price appreciation. It’s D/E ratio is 2.82 and while this is above the 2.0 ratio that companies strive for, it’s still extremely manageable.
Over all I am going to be adding ET to my Roth IRA. It has a strong dividend that is relatively safe, is still expanding its business and is able to do so better than its competitors and it is updating with modern times to better incorporate renewable and green energy into its services. I am going to be buying ET until it tops $8.75 personally and going to just let it DRIP. I personally see it hitting a high of $12-$14 in the current Biden admin and potentially $16 should he or another Dem win in 2024.
I’m not a financial advisor, just a dude using Google who likes listening to earnings reports and can recognize when a stock is beaten down a bit too much because of current news but is likely to recover and even exceed where it was at previously. Let me know what y’all think, would love to hear some opinions. This is my largest DD write up so far and would love some tips for future ones I want to do. Submitted April 04, 2021 at 08:50AM by TheFondestComb https://ift.tt/31I45za
