In August of 2017, I purchased my first block of shares in Energy Transfer Partners (ETP) which merged with Energy Transfer Equity (ETE) and formed Energy Transfer (ET). Each quarter, I smile when their dividend gets paid and reinvested back into the company. I have previously written about how I feel Energy Transfer has been undervalued as MLPs, in general, haven’t recovered from the large selloff they faced in 2015. ET crushed earnings as they reported record adjusted EBITDA and Distributable Cash Flow, yet the share price is still depressed as it trades for around $15 per share. ET currently supports a forward dividend yield of over 8% with ease as their distribution coverage ratio at the end of Q1 2019 was 2.07x. ET’s distribution coverage ratio yielded an excess coverage of $856 million distributable cash flow after distributions. Tuesday morning, on CNBC, Michelle McKinnon who is my new favorite stock expert (sorry Tim Seymour) gave her perspective on ET and absolutely crushed it. Don’t be fooled by the headlines about transitioning to 100% renewable energy in the near future as the global energy demand is going to outpace the transition to renewables for a long time. ET is positioned for growth as their Q1 results prove, and it's time to get very bullish on ET and energy in general.
(Source: Energy Transfer May 2019 Investor Presentation)
Energy Transfer is improving their overall financials and metrics
The first quarter in 2019 was proof that ET is delivering on their commitment to increasing shareholder value by transforming key financial metrics. Management delivered a YOY increase of 40% record adjusted EBITDA of $2.8 billion. The DCF also increased by almost 40%. The distribution coverage for Q1 was 2.07x as excess distributable cash flow after distributions were $856 million. ET is forecasting that they will generate $2.5-3.0 billion per year in distribution coverage and will sustain a 1.7–1.9x long-term coverage ratio. In 2019, ET believes they are on track to generate between $10.6 billion and $10.8 billion in adjusted EBITDA and spend roughly $5 billion on organic growth projects.
This should make current shareholders and potential investors extremely happy. For all intents and purposes, the merger between ETE and ETP to form ET was a major success, and the combined entity is performing well. The larger distributable cash flow after distributions is huge as ET can put this to use in many ways. These metrics should continue to improve through the addition of ET’s organic growth projects which should increase distributable cash flow to continue their organic growth and start increases to their dividend.
Energy Transfer is delivering on their growth story and setting up for long-term international growth
ET has grown its enterprise value to roughly $90 billion with an asset base that spans across all the major supply basins and major U.S markets. ET gathers 12.7 million mmbtu of gas and 563,000 bbls/d of NGL’s produced on a daily basis. They transport 24 million mmbtu/d of natural gas through their network of 69,200 miles of pipelines. ET also transports 4.5 million barrels of crude oil per day through approximately 9,500 miles of pipelines located across 16 states. ET also owns roughly 4,770 miles of NGL pipelines, which have an aggregate transportation capacity of approximately 2,053 MBbls/d. ET also generates revenue from more than 7.9 billion gallons of motor fuel sales. ET’s current projects will increase the amount of fuels traveling through their expansive system to fuel their future growth.
I previously wrote an article outlining many of ET’s growth projects, but for this article, I want to focus on ET’s focus on exports. I am very bullish on exporting, and one of their projects I am most excited about is the Lake Charles export facility. The project is fully permitted and uses the existing infrastructure and benefits from an abundant natural gas supply and is located near a major pipeline infrastructure which includes ET’s pipeline network. If the project is sanctioned through an affirmative FID, it would convert ET’s existing Lake Charles LNG import and regasification terminal to an LNG export facility. The facility would have a liquefaction capacity of 16.45 million tons per annum. The Lake Charles LNG export facility would be a joint venture between ET and Shell US LNG LLC, which is a wholly owned subsidiary of Royal Dutch Shell p.l.c (NYSE:RDS.A). The facility will sit on a 152-acre site and consist of two existing deep-water docks to accommodate ships up to 215,000 m3 capacity and have four LNG storage tanks with a capacity of 425,000 m3.
ET also has the Nederland Terminal and Marcus Hook Industrial Complex which makes them the only logistics provider with export facilities on both the U.S Gulf Coast and the East Coast. This provides both optionality and security of supply for customers. The Nederland Terminal is a 1,200-acre site on the U.S Gulf Coast, which has a 1.5 million bbls/d crude export capacity and 200,000 bbls propane/butane export capacity. ET also built out their crude storage capacity to house 28 million bbls of crude storage capacity and 1.2 million bbls refrigerated propane/butane storage capacity. There are 5 ship docks and 4 barge docks to accommodate Suez Max-sized ships with rail and truck unloading capabilities. As part of the Orbit project, 800,000 bbls of refrigerated ethane storage is under construction, and there is space available for further dock and tank expansion.
The Marcus Hook Industrial Complex is an 800-acre site with inbound and outbound pipeline. The complex will have 280 thousand bbls/d NGL export capacity with room for expansion and 65 thousand bbls/d ethane export capacity. ET will have the capacity for 2 million bbls underground NGL storage, 3 million bbls above-ground NGL storage and 1 million bbls crude storage capacity. There will be 4 seaborne export docks to accommodate VLGC sized vessels.
These three export facilities will be ET’s platform to capitalize on international growth and the global demand for energy. In April of 2019, ET opened a new office in Beijing to continue their expansion into new markets and increase to their export capabilities to Asia. The Lake Charles, Nederland, and Marcus Hook Terminals will allow ET to leverage new business opportunities internationally with a focus on marketing energy products to China and other Asian countries. I believe setting up shop in China in addition to their strategic partnership with RDS.A will exceed the Lake Charles facility and help ET secure more contracts to export hydrocarbons to China and other Asian markets.
(Source: Energy Transfer May 2019 Investor Presentation)
The global energy trends are supporting growth throughout the energy sector, especially ET’s planned expansion to Asia
The United States, according to the EIA, will become a net energy exporter after 2020 and net exports of natural gas in the U.S will continue to grow through 2050. On May 2nd, the European Commission released a report stating that Since July of 2018 U.S exports of liquefied natural gas to Europe surged by 272%. The European Commission also announced that the European Union has committed to double the current annual LNG imports from the U.S within five years. This would bring the annual total imported by the European Union to a level equivalent of 8 billion cubic meters in 2023. On April 22nd, 2019, Exxon Mobil (XOM) signed a 20-year LNG agreement with Zhejiang Energy a Chinese energy company to supply 1 million metric tons of LNG annually. Reuters reported that Zhejiang Energy is building a receiving terminal for the fuel in Wenzhou in the eastern province of Zhejiang, which will cost the equivalent of $1.34 billion and have the capacity to handle 3 million tonnes. On April 26th, 2019, Australia joined the list of U.S crude oil importers as two tankers embarked to their destination.
I believe the headlines of a trade war are overblown. At the end of the day, the global demand for energy is a necessity that can’t be avoided. Too many people focus on the day-to-day headlines instead of the long-term picture. From 2020 to 2050, the global population is expected to grow by almost 1.98 billion people. In the short term, the global population is expected to grow by just over 390 million people from 2020 to 2025. To put that in perspective, the U.S Census Bureau indicates the U.S population is currently at 328,928,561. From 2020 to 2025, the global population will add more people than the current U.S population, so we are basically adding another large country to the map. Russia currently has a population of 141,944,641, and China has a population of 1,389,618,778. By 2050, the global population is expected to grow by 1.98 billion, which is just over 119 million more people than the combination of the current population of the U.S, Russia, and China.
BP p.l.c (BP) is predicting that the global energy demand will continue to increase through 2040, led by China and India. The utilization of natural gas will increase the most followed by renewables filling the void of a decreasing dependence on coal. Oil utilization will also increase through 2030 then stabilize and start to decrease around 2040. The combination of industrialization of third world countries and a growing population should make BP’s predictions hold true.
Energy Transfer is in a great position to capitalize on the global population growth and the growing global energy demand. ET will be able to increase their revenues and profits from increased fuels moving through their pipes for domestic use and international exports. Some of the exports will come from ET’s facilities in addition to the other export facilities the Federal Energy Regulatory Commission (FERC) has approved. Once the export facilities which are under construction and pending construction are operational, combined with the current operational U.S export facilities, a total of 26.7 Bcfd of LNG exports will be flowing from U.S. shores. Energy Transfer has over 86,000 miles of pipeline infrastructure across the U.S., which is growing from organic projects. ET should generate substantial additional revenue from the increase in exporting capabilities from the U.S. shores as the fuel needs to be transported to these export facilities.
(Source: BP Energy Outlook 2019 Edition)
Energy Transfer’s dividend is extremely large and has room to grow
ET currently has a dividend of $1.22 per share, which is a yield of 8.17%. With the growing DCF and the global prospects of an increasing energy demand, ET should have no problem increasing their dividend while funding additional capital projects. With a dividend at 8.17%, even if the share price doesn’t increase, you can compound your way to great returns. If ET stays at the same share price over the next four quarters, an investment of 100 shares would generate $125.79, if the shares are reinvested each quarter, when we account for compounding. At the end of the year, you would have 108.43 shares ready to go right back to work increasing your distribution and share count each quarter. If you were to purchase 1,000 shares under the same methodology, at the end of the year, ET would have paid you $1,257.92, and you would have an additional 84.31 shares. If time is on your side, and you can sit back and let the dividends compound as the global energy story plays out, you should be able to compound your way to very impressive returns even if the share price stays stagnant for a long period of time.
(Source: Steven Fiorillo) (Data Source: Seeking Alpha)
I believe ET is currently undervalued and provides investors with an interesting opportunity. The energy sector has missed one amazing bull market, leaving share prices of these companies quite depressed. With shares of ET sitting just under $15 per share with a dividend just over 8%, there aren’t many reasons not to own it here. The headlines are overblown, and 100% renewable energy isn’t going to be a reality anytime soon. We are still using a combustible engine in 2019 so the chances of replacing all fossil fuels with renewables are incredibly unlikely. The facts are that, on a global scale, imports of energy are increasing as the global energy demand increases due to industrialization of third world countries and a growing population. The population increase we will see by 2050 will be equivalent of having an additional continent on the planet.
While energy companies, including exploration and MLPs, have fallen out of favor, the global landscape will need to continue to produce fossil fuels and have a way to transport them. ET has a massive infrastructure for the growing needs of the energy industry while expanding to capture a piece of the profits from exporting. Even if the share price flatlines, the dividend is more than enough to generate healthy income or amazing compounding returns. I believe ET will trade in the low to mid-twenties over the next several years or maybe higher while increasing their dividend on an annual basis from their growing DCF. I am very long on ET as I can easily see a 33% upside with a huge dividend as the cherry on top.
Disclosure: I am/we are long ET, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.