With the market itching for the so-called “healthy correction,” now seems like the ideal time for investors looking to rotate out high-growth tech and semiconductor names and diversify assets into master limited partnerships (MLPs). One name that comes to mind is Energy Transfer Partners LP (NYSE:ETP).
Although ETP stock is down more than 13% year to date, hurt by the weakness in energy prices, the company has a consensus analysts price target of $30, calling for potential premiums of 40% from current levels of around $21. That’s excellent value, especially when combined with its 10.28% annual dividend yield, which is not only more than five times the yield offered by the average stock in the S&P 500 index, it is well above the 7.8% available in the MLP space.
Why Bet on ETP?
Headquartered in Dallas, Energy Transfer Partners is a master limited partnership, engaging in the intrastate transportation and storage business of natural gas in the U.S. The MLP business model, which allows the partnership to derive a minimum of 90% of cash flows from commodities, natural resources or real estate, also comes with number of tax benefits, too. This, in turn, allows the MLP to distribute strong yields.
Another reason to like Energy Transfers Partners is the company’s diversified portfolio of energy assets, which includes 71,000 miles of crude oil, natural gas, natural gas liquids and refined products pipelines across 36 states. And, since its merger earlier this year with its smaller sister entity Sunoco Logistics Partners, ETP has improved its capabilities in areas such as terminalling facilities and fractionation and storage.
The fact that the company’s $3.8 billion project, Dakota Access Pipeline, became operational on Jun 1 should drive higher revenue and profits in the quarters ahead. With a capacity to carry approximately 520,000 barrels of oil per day, the pipeline — at 1,172 miles long — will carry oil between North Dakota and Illinois. At which point, the oil will be transported to the refineries on the Gulf Coast or East Coast.
Notably, when it comes to oil producers in other U.S. oil-producing areas such as the Williston and Permian basins, the Dakota Access pipeline is said to have capacity to carry about 520,000 barrels of oil per day, meaning it can potentially bridge the gap between Bakken players like Hess Corp. (NYSE:HES).
This is because analysts expect the pipeline, which can help reduce transportation costs for operators, can help improve the region’s drilling economics and spur higher profits by Bakken players, who are struggling today. All told, when factoring the support the Dakota Access Pipeline has received from President Trump’s administration, Energy Transfer Partners has emerged into one of the better MLPs to bet on for the next 12-18 months.
Looking ahead, the company is expected to earn 18 cents per share on revenue of the $7.29 billion in the quarter that ends June. For the full year, ETP stock is expected to earn 83 cents per share, while revenue is expected to grow to $30.4 billion. These numbers could be conservative, especially in this environment of rising oil and gas production.
Bottom Line for ETP Stock
Overall I expect MLPs to see an increase in volume as rising oil and gas production continues. But, it’s tough to argue that any other company is better positioned to benefit in this trend than Energy Transfer Partners. And, with industry analysts projecting on the Dakota Access Pipeline to unlock the nation’s economic potential and lead to the creation of jobs, there are many stakeholders betting on the pipeline’s success, not the least of which is the White House.
And, while Energy Transfer Partners has come under pressure recently, its future is still looking bright and investors who are looking for a turnaround candidate that pays a strong dividend yield can do well with ETP stock.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.