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Energy Transfer: Pipelines and Profits
07/20/2017 2:54 am EST
Based in Dallas and with a market cap of $23.4 billion, Energy Transfer Partners (ETP) is one of the largest MLPs; it was formed by the merger of Energy Transfer Partners and Sunoco Logistics Partners, notes Mark Skousen, editor of High-Income Alert.
Its assets include more than 71,000 miles of natural gas pipelines, 10 natural gas processing plants, six natural gas treatment facilities and three natural gas storage facilities. The trust serves more than 1 million customers across the United States.
Pipelines still offer by far the cheapest way to ship oil and gas over long distances. Trains and trucks offer some competition, but pipelines are much less labor-intensive and require little maintenance.
Furthermore, there are significant barriers to entry. Acquiring the regulatory approval to build a new pipeline is a long and difficult process. And the significant investment required generally stops new competition in its tracks.
Of course, everything energy-related has been crushed recently. And pipeline partnerships are no exception. From a high of more than $31 a share just 11 months ago, Energy Transfer now trades near $20. Yet I believe this sector is overdue for a substantial rebound. Here’s why.
Commodity producers are exquisitely sensitive to a drop in resource prices. After all, lower prices mean lower profit margins and perhaps no profit at all.
But pipeline operators transport the stuff no matter what the price. In fact, lower prices generally stoke demand over the longer term, adding to volume.
Someone who apparently shares my assessment is Energy Transfer Chairman and CEO Kelcy Warren. Last week. he purchased a whopping 1 million shares at $20.33, an investment of more than $20 million.
Warren realizes that earnings at ETP are likely to climb from 73 cents a share this year to more than $1 a share in 2018. That will not only boost the share price, it also will increase the already substantial 10.6% yield.
This is an excellent contrarian play, one with big upside potential, a huge dividend and telltale insider buying. So pick up Energy Transfer Partners at market. And place a sell stop at $16 for protection.
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