Energy Transfer LP: The Right Time for this MLP

08/14/2019 5:00 am EST

Focus: ENERGY

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The most opportune time to consider MLPs is when energy prices are down or have stagnated. The time when investors have low expectations and energy is out of favor — like now, explains growth and income expert Ian Wyatt, editor of High Yield Wealth

We think Energy Transfer LP (ET) is the right MLP for income investors given the state of the market today. Its distribution yield is the immediate and obvious draw. It pays a $0.305-per-unit quarterly distribution ($1.22 annually). The distribution generates a 9% yield on the unit price — the highest among its peers. 

Energy Transfer is the largest energy MLP on the planet. Its equity market cap exceeds $37 billion. It is primarily a midstream MLP. Pipelines are the bedrock of the business.  It owns a vast web of them that covers 86,000 miles extending through 38 states.

Energy Transfer has spent a lot of money over the past four years to grow. This year alone it expects to invest $5 billion in expansion projects.

Management's giddy-up strategy is observable in the top line. Revenue has swelled to $55.3 billion over the trailing 12 months compared to $36.1 billion only four years earlier. 

But growth comes with a cost. It has increased the debt load by a considerable amount. Fortunately, management is managing the risk and has improved its debt coverage over the past year. Credit-rating agencies have taken note of Energy Transfer’s improving finances.

Moody's revised Energy Transfer's credit outlook from negative to stable late last year while putting it on review for an upgrade. Fitch, and S&P Global have both upgraded the partnership’s credit rating to investment grade.

Energy Transfer offers a 9% starting distribution yield — the highest among its midstream peers. The yield is the product of improving cash flow and a low valuation.

Energy Transfer sports a $95.5 billion enterprise value (debt plus equity value minus cash). It’s valued at only 8.9x this year's projected EBITDA. The peer group average enterprise value-to-EBIDTA is 11x.

If Energy Transfer units were to appreciate to within a percentage point of the peer group average of 11x, we could easily see 12%-to-15% unit-price appreciation. That’s a big move for a high-yield MLP investment.

We think it’s doable. Therefore, our 12-month unit price target is $17. What’s more, our target is conservative compared with most analysts. Morningstar, which also leans toward conservatism, has a $22 target.  

The time to buy a quality MLP is when valuations and energy-market expectations are low and sustainable distribution yields are high. That’s the case for Energy Transfer now.

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