3 Reasons That Energy Transfer Will Have a Good Year

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For the past couple of years, shares of Energy Transfer (NYSE:ET) — a large midstream pipeline operator — have grinded lower. Consider that during this period ET stock has gone from highs of $19 to $13.60.

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Now there are certainly legitimate reasons for this. After all, the entire energy sector has been a laggard. It does not matter if the company is a giant, like Exxon Mobil (NYSE:XOM) or Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), or a smaller player. For the most part, there have been heavy supplies of oil and natural gas on the global markets. A big reason for this has been the strides made in production from fracking.

Another issue for ET stock is the corporate structure. The master limited partnership (MLP) organization presents more complexities for investors. For instance, when preparing taxes, investors will have to file the IRS Schedule K-1 form. There is also the problem that the tax advantages have diminished because of President Donald Trump’s tax bill. Because of this, some MLPs are converting over to regular corporations.

But despite all this, I actually think ET stock is worth a look right now. Why? Well, let’s take a look at three reasons below.

Geopolitics

There has definitely been a ramping of tensions in the Middle East. There was the missile attack on the Aramco plant in September that shut down half of Saudi Arabia’s output. Then there was the U.S.’s killing of Iran’s top military leader, Qasem Soleimani, which precipitated a retaliation against an airbase in Iraq.

Yet the impact on the price of crude oil was negligible. This is in contrast to what happened during the prior Gulf wars. Both saw a surge in oil prices and even a recession during the early 1990s.

But the Middle East remains in a dicey situation and there could still be more disruptions. The Iranian militias are a wild card as they have some degree of independence and may strike out on their own as revenge.

SemGroup Deal

ET recently closed its $5 billion acquisition of SemGroup. True, the deal came under some criticism because of the rich valuation.

But it does seem now like this has been an overreaction. Not only will SemGroup help to boost cash flows, have no material credit impact and be immediately accretive, but there will be clear-cut cost synergies. ET estimates that they will come to over $170 million.

There are also some important strategic benefits to the acquisition. SemGroup’s Houston Fuel Oil Terminal (HFOTCO) will provide access to major sources of crude from the Permian Express and Bakken pipeline systems. The terminal has over 18 million barrels of crude oil storage, five deep-water ship docks and seven barge docks.

The deal will also expand ET’s crude and natural gas liquids gathering and transmission lines to Colorado’s DJ Basin as well as the Anadarko Basin in Oklahoma.

High Yield on ET Stock

One of the biggest attractions of ET stock is its dividend yield. Note that it currently sits at a juicy 9%.

Granted, when a yield is this high, there are concerns that the company may ultimately cut the payout. But keep in mind that ET has strong cash flows. For example, the company expects to produce EBITDA of $11 billion for the past year.

What’s more, the valuation of ET stock is fairly low. Note that the trailing price-to-earnings ratio is at only about 11x.

Oh, and Wall Street analysts also see value in ET stock, with a price target of $18. This implies about 34% upside from current levels.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/3-reasons-that-energy-transfer-will-have-a-good-year/.

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