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Top Picks 2018: Energy Transfer Partners LP (ETP)

01/18/2018 5:00 am EST

Focus: ENERGY

Tim Plaehn

Investment Research Analyst, Investors Alley

I am forecasting that the energy midstream/infrastructure sector will return to valuation growth in 2018 and there is lots of upside potential in the group, explains Tim Plaehn, editor of The Dividend Hunter.

Through 2017, MLP sector market values declined sharply even as business fundamentals continued to improve. 2018 should be the year when investors realize very attractive returns from the quality companies in the sector.

Energy Transfer Partners LP (ETP), my aggressive idea for 2018, is one of the largest MLPs, with a $20 billion market cap. The MLP and other energy service company stocks experienced a bear market in 2015, stabilized their business operations in 2016, and into 2017.

The company owns and operates an extensive network of natural gas and crude oil pipelines, terminals and processing facilities. Energy Transfer Partners owns assets in all the major oil and gas energy plays.

Those assets allow for commercial synergies across the entire midstream value chain, including gas, crude and natural gas liquids, known as NGLs.

In recent years the company has invested heavily in new growth projects, and will have $10 billion worth of those projects coming on line between mid-2017 and the end of 2019.

As the projects start to earn revenue, the Energy Transfer Partners distributions will be covered by free cash flow and continue to grow.

In the four quarters through the 2017 third quarter, EBITDA and distributable cash flow have climbed steadily higher.

The company has continued to increase the quarterly distribution with a 3% annual growth rate. DCF coverages of distributions was 1.03 times over the last four quarters. This is not great coverage, but Energy Transfer is covering the payouts to investors.

Market participants are primarily worried about ETP’s large debt load, which has grown to fund the growth capex and currently stands at over $34 billion.

Management has stated that they will not need to access the capital markets in 2018. With new projects coming on line, EBITDA growth will quickly bring down the debt/EBITDA ratio.

With a current 13% yield, the market is pricing ETP with the expectation of a dividend reduction. Management is determined to continue and even grow the current distribution rate.

Once investors see the current payout is stable and well covered by cash flow, the ETP share price will rise to bring the yield down to as low as 8%. To get the yield down to that level, the share price would need go close to double.

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