Energy Transfer Partners: A Promising Long-Term Play With An 8.25% Yield?

Jun.15.12 | About: Energy Transfer (ETP)

Investors would do well to follow some of the suggested guidelines when it comes to looking for new investment ideas. These are not absolute rules; they are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible. We take a look today at Energy Transfer Partners (NYSE:ETP) in greater detail:

Reasons to be bullish on Energy Transfer Partners:

  • A great distribution of 8.25%
  • A strong quarterly earnings growth rate of 350%
  • Profit margins of 23.7%
  • Sales increased from $5.5 billion in 2009 to $6.8 billion in 2011.
  • EBITDA increased from $1.5 billion in 2009 to $1.6 billion in 2011.
  • Net income for the first quarter surged to $1.15 billion an increase of $879 million over the three months ended March 31. 2011.
  • EBITDA for the first quarter came in at $536 million an increase of almost $65 million over the three months ended March 31, 2011.
  • A good interest coverage ratio of 9.33
  • An estimated 3-5 year EPS growth rate of 12%
  • A decent current ratio of 1.10
  • Year over year projected growth rates of 5.49% and 50% for 2012 and 2013, respectively.
  • The partnership's sale of its propane business was a move in the right direction as it will help it focus on its pipeline business. The proceeds from the sale will also help it pay down its debt and reduce the need to raise financing from external sources.
  • It is well positioned to benefit from the surge in production of natural gas from unconventional sources. It has the largest intrastate system in Texas. It is linked to nearly every natural-gas shale play in North America, including Fayetteville, Barnett shale, Haynesville, etc.
  • In 2011, it entered into a partnership with Regency Energy Partners to purchase LDH Energy asset holdings for $1.9 billion; it is now known as Lone Star. This acquisition will be accretive to the bottom line while expanding the partnership's assets in the midstream services and transportation and storage business.
  • The acquisition of Sunoco for $5.3 billion will enable it to infiltrate further into the crude oil transportation market as natural gas continues to face pressure from multi-year low prices.
  • $100K invested for 10 years would have grown to $172K. If the dividends were reinvested the rate of return would be much higher.

Click to enlarge

Click to enlarge

Click to enlarge

Important facts investors should be aware in regards to investing in MLP's

Payout ratios are not that important when it comes to MLPS generally pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.

MLPs issue a Schedule K-1 to their investors. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1000 and in some cases negative. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your units. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.

Company: Energy Transfer Partners

Levered Free Cash Flow = -543.81M

Brief Overview

  1. Percentage Held by Insiders = 3
  2. Relative Strength 52 weeks = 53
  3. Cash Flow 5-year Average = 4.97
  4. Profit Margin = 23.75%
  5. Operating Margin = 17.56%
  6. Quarterly Revenue Growth = -22.6%
  7. Quarterly Earnings Growth = 350.9%
  8. Operating Cash Flow = 1.31B
  9. Beta = 0.96
  10. Percentage Held by Institutions = 21.8%
  11. Short Percentage of Float = 3.1%


  1. Net Income ($mil) 12/2011 = 669
  2. Net Income ($mil) 12/2010 = 617
  3. Net Income ($mil) 12/2009 = 792
  4. Net Income Reported Quarterly ($mil) = 1115
  5. EBITDA ($mil) 12/2011 = 1631
  6. EBITDA ($mil) 12/2010 = 1398
  7. EBITDA ($mil) 12/2009 = 1520
  8. Cash Flow ($/share) 12/2011 = 5.67
  9. Cash Flow ($/share) 12/2010 = 5.34
  10. Cash Flow ($/share) 12/2009 = 6.32
  11. Sales ($mil) 12/2011 = 6850
  12. Sales ($mil) 12/2010 = 5885
  13. Sales ($mil) 12/2009 = 5417
  14. Annual EPS before NRI 12/2007 = 3.31
  15. Annual EPS before NRI 12/2008 = 4.09
  16. Annual EPS before NRI 12/2009 = 2.51
  17. Annual EPS before NRI 12/2010 = 1.47
  18. Annual EPS before NRI 12/2011 = 1.48

Click to enlarge

Dividend history

  1. Dividend Yield = 8.25
  2. Dividend Yield 5 Year Average = 7.9
  3. Dividend 5 year Growth = 1.56

Dividend sustainability

  1. Payout Ratio = 0.75
  2. Payout Ratio 5 Year Average 12/2011 = 1.68


  1. Next 3-5 Year Estimate EPS Growth rate = 12.05
  2. ROE 5 Year Average 12/2011 = 19.14
  3. Current Ratio = 1.10
  4. Current Ratio 5 Year Average = 1.15
  5. Quick Ratio = 0.61
  6. Cash Ratio = 0.19
  7. Interest Coverage Quarterly = 9.33

Conclusion: It's attempting to put in a bottom right now. Consider waiting for a test of the 42 ranges before deploying new capital. Another option would be to wait for it to test this range and then sell puts at strikes you would not mind owning the stock at.

Note: EPS and Price Vs industry charts obtained from A major portion of the historical data used in this article was obtained from

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: We could sell puts over the next 3-5 trading days.

Disclaimer: This article is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.