Energy Transfer Could Double

We recently analyzed Cheniere Energy (LNG) in a deeper look into the natural gas complex.

Today, we wanted to go over the top midstream oil and gas stock search by financial pros according to our proprietary data – Energy Transfer L.P. (ET).

While Cheniere focused on natural gas export, Energy Transfer plays on natural gas transportation within the U.S.

And they have some eye-popping stats:

• 90,000+ miles of pipeline
• Transports ~25% of all the U.S. natural gas produced
• Transports more than 35% of all the crude oil produced in the U.S.
• Transports more than 25% of all the natural gas liquids produced in the U.S.

And they pay a massive 7.31% just for starters…

Energy Transfer’s Business

As a midstream limited partnership, Energy Transfer is required to pass along 90% of qualifying income to shareholders to enjoy preferential tax treatment that allows it to avoid corporate taxes.

Hence, the big dividend.

The majority of Energy Transfer’s infrastructure resides in the oil-heavy gulf and plain state regions.

What makes Energy Transfer particularly unique are the balanced contributions for each of its operating segments.

Over the last two decades, the company has also successfully acquired a handful of energy companies, with a few well-known names.

Recently, management turned its focus towards generating cash flows and de-risking the company. That includes reducing long-term debt, simplifying the corporate structure, and becoming more disciplined in its acquisition approach.

Financials

Like most midstream companies, Energy Transfer generates revenues from the volume of energy that moves through its system rather than the price of crude or natural gas.

Although volumes slipped in 2020, they recovered nicely in 2021 with gross margins dropping 3.7% and operating margins dropping by 0.5%.

Nonetheless, the higher volume allowed the company to generate over $11.3 billion in operating cash flow, its highest over the last decade by more than 41%.

This additional volume is expected to continue as economies continue their recovery from the pandemic.

Additionally, the company has cut down on capital spending and expanding its infrastructure to instead focus on shareholder returns.

As we mentioned earlier, management is focused on reducing long-term debt which currently sits at a hefty $44.8 billion down from $51.4 billion a year ago.

Valuations

To evaluate the company’s fundamentals, we wanted to compare its peers from our search data.

We immediately see that from a price-to-earnings ratio (P/E) standpoint, Energy Transfer is the cheapest of all the companies whether looking at the last twelve months or forward to the next twelve.

In fact, it’s the cheapest with regard to every measure listed here.

Heck, the price to forward cash flow is even better at 2.44x.

Is it because growth is lower at Energy Transfer?

Not especially.

When we look at the compounded annual revenue growth over the last several years, Energy Transfer doesn’t look that great. However, it’s by no means the worst.

In fact, its EBITDA and EPS growth are pretty decent with the exception of the forward diluted EPS growth.

So if growth isn’t the issue, then it’s got to be profitable?

Not so fast.

While gross margins aren’t as lucrative as other players, the net income is in line. And the return on equity, assets, and total capital is phenomenal.

Our Opinion – 10/10

This is a no brainer. With a lucrative dividend and a bright outlook, this stock is a steal trading below $10.