After a cataclysmic drop due to the novel coronavirus, the energy market has made a remarkable comeback. One of the fortunate recipients of this broader bullishness is Energy Transfer (NYSE:ET). During the worst period of the crisis, it appeared as though ET stock was destined to drop into oblivion. Now, with a surprisingly positive May jobs report acting as a springboard, Energy Transfer is ready to rock and roll.
Additionally, what makes ET stock so attractive is its dividend yield. At over 13% at time of writing, Energy Transfer is giving you an incredible platform for passive income. Further, potential buyers have the Federal Reserve to thank. In a bid to support the economy even before the Covid-19 crisis began, the Fed adopted a dovish monetary policy. But that action lowered benchmark interest rates.
Therefore, receiving robust yields, particularly double-digit ones, is a factor that has tempted investors. However, ET stock isn’t without its risks.
Aside from its underlying volatile business, Energy Transfer is a master limited partnership (MLP). One of the drawbacks here is a complicated tax structure. According to Barron’s Simon Lack:
MLPs come with a different sort of tax burden. Investors have to submit a K-1 for each MLP they own. The Schedule K-1 is a laborious, complex form. Most investors have their accountants handle these forms. They pay for the accountant’s extra time. So whatever money they hoped to save by avoiding corporate taxes can quickly be erased.
There are many other considerations as well regarding the nature of MLPs. But for our purposes, I will explore two pros and two cons as it relates to Energy Transfer’s present fundamentals.
Pro: Excellent Jobs Report Could Help ET Stock
Primarily, the driving force for ET stock recently – along with several other investments – is the surprisingly robust May jobs report. While many economists were predicting doom and gloom for last month’s read in the labor market (and I own up to that prognostication as well), the results went completely in the opposite direction.
Rather than continuing the erosion in jobs, the economy added 2.5 million employment opportunities. Essentially, as states opened their doors for business, many companies brought back their furloughed employees. Also, the pandemic created new demand for certain jobs, such as delivery drivers.
Of course, critics have their issue with the implications behind the report, which I’ll address soon. But the most important lesson that bulls will offer in support of their thesis is that the worst may be behind us. And that augurs well for ET stock, which has suffered from an acute loss of demand.
Pro: Hurricane Season Might Be a Cynical Catalyst
As if our nation needed more potential problems to worry about, the National Oceanic and Atmospheric Administration released a startling report. The agency forecasts that this year’s hurricane season may be unusually active, presenting challenges to government officials who are trying to contain the still worrisome coronavirus outbreak.
It’s too early to say whether inclement conditions will create a supply constraint for natural gas, thereby boosting ET stock. Also, our natural gas production sources are much more diversified than in years past, making this a risky narrative to gamble on exclusively.
Nevertheless, unusually cold weather events can also disrupt production, which would invariably constrain supply. With an unprecedented crisis already on our hands combined with potential natural headwinds along the way, it might not be a bad idea to buy some ET stock right now.
Con: Jobs Recovery Is Unbalanced
Although the Trump administration has celebrated the May jobs report as confirmation of his pro-business policies, neither the White House nor any other entity should be too quick to celebrate. Don’t get me wrong – optimism is wonderful. What I’m saying is that we should not declare victory until we have legitimately solved this crisis.
Specifically, when you look at the details of the jobs report, you’ll notice that the recovery is unbalanced. According to the Bureau of Labor Statistics, Whites and Hispanics saw sizable reductions in their unemployment rates. However, Blacks saw a slight uptick in unemployment, while Asian joblessness ticked conspicuously higher to 14.8% from 14.3%.
Such division in the benefits of the May recovery will likely fuel present racial tensions. Certainly, if the circumstances don’t balance out by June or July, we may see more unrest. Naturally, this clouds the narrative for economic stability, which doesn’t do ET stock any favors.
Con: Global Oversupply Is Still a Problem
Despite the positive implications of the headline jobs numbers, many Americans are still likely in a “hunker down” mode. In April, the personal saving rate hit 33%, which far exceeds any single month’s tally since the government kept records.
Granted, as the economy reemerges from the coronavirus mess, you would expect the PSR to decline. However, it will almost surely be elevated relative to historical averages. After such a cataclysmic event, we just don’t know what lies over the horizon.
Not surprisingly, Bloomberg recently reported that “Natural gas prices could go negative on global oversupply.” According to industry insiders, demand is still falling globally and just as significantly, storage capacity is nearing its limits.
Of course, it’s possible that the May jobs report is signaling a quicker-than-anticipated recovery. This Bloomberg story was published a few days before the report. Still, it’s difficult for any one month’s worth of backward-looking data to significantly impact future conditions. Therefore, conservative investors may want to sit on the sidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.