To The Moon

$Energy Transfer LP(ET)$

Energy Transfer (ET) is a company in the energy sector that has experienced significant growth over the past five years, recovering from a sharp decline in 2020. Since then, its stock price has surged by more than 200%. One of the key factors contributing to its success is its location in the USA, which shields the company from geopolitical issues, such as conflicts in the East, that affect other global companies. Although Energy Transfer focuses primarily on natural gas, rather than the growing trend of green energy, there will always be demand for natural gas in the coming decades, which provides a stable outlook for the company.

Earning Overview

Net Income: The company reported a net income attributable to partners of $1.18 billion for the quarter ending September 30, 2024, with a net income per common unit (basic) of $0.33. Adjusted EBITDA: Adjusted EBITDA increased to $3.96 billion, up from $3.54 billion in the same quarter of the previous year. Distributable Cash Flow (DCF): DCF attributable to partners, as adjusted, was $1.99 billion, marking a slight increase from the $1.98 billion reported in Q3 2023.

Fundamental Analysis

Revenue Trends: Energy Transfer has seen stable revenue growth in recent years, driven by an expanding pipeline network and higher volumes of transported energy. The company's diversified portfolio of energy assets, including its pipelines, storage facilities, and terminals, supports consistent cash flow.

Another strength of Energy Transfer is its positioning in the southern United States, an area experiencing strong population growth. This demographic expansion should increase demand for the company’s services without requiring massive investments in new infrastructure.

Crude Oil and NGL Pipelines: The company achieved record volumes through its crude oil midstream gathering and NGL pipelines, as well as through its NGL fractionators. Exports: Energy Transfer experienced strong crude and NGL exports during the quarter, contributing to its overall performance. NGL and Refined Products: Adjusted EBITDA was $1.01 billion, slightly down from $1.08 billion in Q3 2023, primarily due to lower gains from the optimization of hedged NGL inventory.

Debt Profile: Energy Transfer has a significant amount of debt, which is common for capital-intensive infrastructure companies. While the company's leverage ratio is high, it maintains a manageable debt level relative to its cash flow generation. The company has been working to reduce its debt burden over time, and its cash flow is generally strong enough to service debt payments.

Long-Term Liabilities: The company’s long-term liabilities are relatively high, but its free cash flow generation is sufficient to cover these obligations. The management has indicated that paying down debt is a priority, which could support future credit ratings and provide greater financial flexibility.

Free Cash Flow

Looking at the company’s financials, Energy Transfer offers an attractive dividend yield of nearly 8%, with a payout of $1.28 and a reasonable trailing free cash flow payout ratio of 56%. While I prefer a payout ratio below 50%, 56% is still manageable. However, its dividend growth has been slow, with only a slight increase from $0.31 to $0.32 over the past five years. Despite this, the company remains strong, with growing revenue, free cash flow, and net income over time.

Guidance

For Q4 2024, ET anticipates an Adjusted EBITDA between $3.8 billion and $4.0 billion. This projection aligns with the company's annual guidance of $15.3 billion to $15.5 billion for 2024, indicating a strong finish to the year.

The company has updated its growth capital expenditures for 2024 to a range of $2.8 billion to $3.0 billion. This includes approximately $300 million of spending deferred from previous guidance, reflecting ET's commitment to strategic investments and infrastructure development.

Fractionator Expansion: The company has approved the construction of a ninth fractionator at Mont Belvieu, with a design capacity of 165,000 barrels per day, expected to be in service by Q4 2026.

Natural Gas-Fired Electric Generation Facilities: ET has commenced construction of eight 10-megawatt natural gas-fired electric generation facilities, with the first expected to be operational in Q1 2025, and the remainder throughout 2025 and 2026.

Technical Analysis

Support and Resistance Levels: The current pivot point is $18.68. Resistance Levels: Immediate resistance is at $21, with further resistance at $24. Support Levels: Support is identified at $18.

Risks and Challenges

Debt and Share Issuance: While ET’s long-term debt is manageable, the growth in shares outstanding raises concerns over dilution and potential pressure on dividend increases. Investors should watch for efforts to reduce liabilities or manage share issuance in the coming years.

Limited Dividend Growth: The company has been cautious with dividend increases, mainly due to its debt obligations and capital expenditure needs. Investors should be prepared for slow growth in this area.

Regulatory Risks: As a major player in the energy sector, ET is subject to regulatory changes, especially environmental regulations related to its pipeline infrastructure. Changes in U.S. energy policies or stricter regulations could increase operational costs.

Market Volatility: While ET is less sensitive to commodity price fluctuations due to its fee-based model, its performance can still be affected by shifts in demand for energy infrastructure, geopolitical tensions, or changes in global energy markets.

Impact on Energy Exports:

Natural Gas and Energy Commodities: The U.S. has been increasing its exports of liquefied natural gas (LNG) to various countries, including China. If tariffs or trade restrictions between the U.S. and China escalate, it could potentially affect U.S. energy exports, including natural gas and oil, which could disrupt demand for Energy Transfer's services, particularly in its pipeline and transportation operations.

Supply Chain Disruptions: While ET operates predominantly within the U.S., an escalation in the trade war could lead to global supply chain disruptions that affect energy prices and infrastructure investments. For instance, higher costs for equipment, materials, or labor driven by tariffs on Chinese goods could impact ET’s operational costs.

Valuation

Energy Transfer’s stock is currently trading at a low valuation, with a P/E ratio of 14.42, well below the ideal threshold of 22.5. This suggests the stock is undervalued relative to its earnings. The company’s long-term liabilities are manageable, but its growing share count and limited decrease in liabilities may prevent significant dividend increases in the near future. Nevertheless, Energy Transfer has the potential for growth, particularly with its solid free cash flow.

Using various valuation methods, including the discounted cash flow model and multiples valuation, the intrinsic value of Energy Transfer is calculated to be higher than its current trading price. Based on these models, the intrinsic value is approximately $22.76, and $17.26, respectively, indicating that the stock is fairly valued compared to its peers. The dividend discount model suggests an intrinsic value of $21.73.

Averaging these values, the ultimate intrinsic value is $26.32, which is 63.92% higher than its current price. Even after applying a 20% margin of safety, the target buy price remains an attractive $21.60. Given these factors, I believe Energy Transfer is currently at break or pullback line.

Market sentiment

In July 2024, Energy Transfer completed the acquisition of WTG Midstream Holdings LLC. Integration of the combined assets is underway, with several projects approved to enhance system reliability and efficiency.

Over the past three months, ET has received 11 Buy ratings and 1 Hold rating, with an average price target of $21.25, indicating an approximate 8.4% upside from the current price. Investor sentiment is predominantly positive, with an average portfolio allocation of 6.81% to ET among 775,905 active investor portfolios. Notably, 45% of ET holders are over 55 years old, suggesting a stable investor base.

Conclusion

To ensure a buffer against uncertainties, Margin of Safety The target buy price for ET would be around $16.50 per share, making it an attractive buy if the stock price drops to this level.

ET has shown consistent revenue, free cash flow, and net income growth, demonstrating solid operational performance. It also maintains a healthy dividend yield of nearly 7%, making it an attractive choice for income-focused investors. Despite fluctuations in energy prices, ET’s business model is resilient due to its focus on essential midstream services, which are less sensitive to price changes than upstream exploration and production companies.

The China-U.S. trade war could introduce volatility in global energy prices and potentially increase costs for materials and tariffs on energy exports. However, Energy Transfer's domestic focus and significant role in U.S. infrastructure make it less vulnerable to direct impacts compared to companies with significant international exposure.

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