ET: Energy Transfer is a Buy Even After its Recent Run Up

Energy Transfer LP (ET - Get Rating) has come a long way from its beginnings as a small intrastate natural gas pipeline operator to now one of the largest and most diversified midstream energy companies with 90,000 miles of pipeline. Its master limited partnership (MLP) units have advanced more than 60% so far this year to close yesterday’s trading session at $10.01. ET is the parent of two other MLPs—Sunoco LP (SUN) and USA Compression Partners, LP (USAC).

To further diversify its business, ET is weighing acquisitions in the booming chemicals business. Furthermore, the company is expected to gain roughly $2.4 billion from Winter Storm Uri, which knocked out power and halted the distribution of natural gas in Texas, and is thus expected to be one of the biggest winners from the storm among a group of natural gas suppliers and pipeline companies.

With increasing demand for its products and services, ET’s value is expected to continue heading north in the coming months.

So, here’s what we think could shape ET’s performance in the near term:

Several Positive Developments

On April 12, Enable Midstream Partners, LP (ENBL) announced that two of its largest unitholders had consented to its merger with ET. This transaction, which is likely to be closed in mid-2021, is expected to be immediately accretive to the company’s free cash flow, post-distributions. Also, the transaction might help expand ET’s footprint across multiple regions and provide increased connectivity for its natural gas and natural gas liquid (NGL) transportation businesses.

ET created a new group within the Partnership in February that is tasked with increasing the Partnership’s efforts to develop alternative energy projects to reduce its environmental footprint throughout its operations.

Robust Financials

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ET’s revenues increased 46.2% year-over-year to $17 million for its fiscal first quarter, ended March 31, 2021. Its operating income for the quarter was $4.07 billion versus $61 million in the prior-year period. The company’s net income was $3.64 billion in the quarter compared to a $964 million net loss in the year-ago period. Also, its EPS came in at $1.21 compared to a $0.32 loss per share in the same period last year.

Reasonable Valuation

In terms of forward non-GAAP P/E ratio, ET’s 5.67x is 49% lower than the11.22x industry average. The stock’s forward EV/Sales and EV/EBITDA of 1.38x and 6.66x, respectively, are also lower than the2.51x and 8.51x industry averages. In terms of forward P/S, its 0.42x is 71.8% lower than the 1.49x industry average.

POWR Ratings Show Promise

ET has an overall B rating, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, ET has an A grade for Value, which is in sync with its lower-than-industry valuation ratios.

It also has an A grade for Growth. This is justified because analysts expect ET’s annual revenue to increase 55.7% in 2021. Its EPS is expected to increase 84.6% for the quarter ending June 30, 2021 and 200% for the quarter ending September 30, 2021.

The stock has a B grade for Sentiment, which is consistent with favorable analyst sentiment.

ET is ranked #13 of 94 stocks in the Energy – Oil & Gas industry. Click here to access ET’s ratings for Momentum, Quality and Stability as well.

If you’re looking for other top-rated stocks in the Energy – Oil & Gas industry, you can access them here.

Bottom Line

ET is expected to have made handsome profits from supplying gas and power during the historical winter storm in Texas in February. The MLP’s units advanced due to optimism surrounding the company’s upcoming acquisition of ENBL. So, we think it’s wise to bet on ET now because it is still trading at a reasonable valuation.

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ET shares were unchanged in premarket trading Friday. Year-to-date, ET has gained 68.35%, versus a 12.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...