Energy Transfer Partners: Is It Time To Take A Position In This 8.5% Yielding Play?

| About: Energy Transfer (ETP)

Energy Transfer Partners has a significant presence in the natural gas midstream, transportation and storage businesses. It is well positioned to compete in this field as its assets are located in major natural gas producing regions in the U.S.

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 also 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.

Additional reasons to be bullish on Energy Transfer Partners (NYSE:ETP):

A great distribution of 8.5%

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%

Year over year projected growth rate of 99% 2013.

Zack's has a consensus EPS estimate for 2012 and 2013 of $1.46 and $2.32 per unit

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.

$100K invested for 10 years would have grown to $472K. If the dividends were reinvested the rate of return would be much higher.

The planned acquisition of Sunoco Inc (NYSE:SUN) for $5.3 billion will provide the company with a chance to diversify its asset mix by adding crude and refined products pipeline to its existing natural gas infrastructure. It will receive 4,900 retail and fuelling stations in the U.S from Sunoco and a 32.4% share in Sunoco logistics partners LP's 7900 miles of oil pipelines.

Darren Horowitz, an analyst at Raymond James & Associates Inc. in Houston, said that the takeover "opens the door for greater growth," allowing Energy Transfer to meet its goal of diversifying both the extent of the company's pipeline network and the products that it ships.

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Important facts investors should be aware in regards to investing in MLPs

Payout ratios are not that important when it comes to MLPs as they 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

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Brief Overview

  1. Relative Strength 52 weeks = 53
  2. Profit Margin = 24.6%
  3. Operating Margin = 19%
  4. Quarterly Revenue Growth = -23.8%
  5. Quarterly Earnings Growth = -24%
  6. Operating Cash Flow = 1.3B
  7. Levered free cash flow = -$506M
  8. Beta = 0.90
  9. Percentage Held by Institutions = 21.8%
  10. Short Percentage of Float = 4.2%
  11. Sales vs 1 year ago = 16%
  12. Sales vs quarter 1 year ago = -23%

Growth

  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) = 111.4
  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

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Dividend history

  1. Dividend Yield = 8.5
  2. Dividend Yield 5 Year Average = 7.9
  3. Dividend 5 year Growth = 2.1

Dividend sustainability

  1. Payout Ratio = 0.78
  2. Payout Ratio 5 Year Average = 1.68

Performance

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  1. Next 3-5 Year Estimate EPS Growth rate = 12.05
  2. ROE 5 Year Average 12/2011 = 19.14
  3. Current Ratio = 0.90
  4. Current Ratio 5 Year Average = 1.15
  5. Quick Ratio = 0.61
  6. Cash Ratio = 0.19
  7. Interest Coverage Quarterly = 9.33

Related companies

For investors looking for other investment ideas in the basic materials sector, data has been provided on two additional companies to help get you started. An explanation for many of the key ratios used in this article can be found here - Reasons To Be Bullish On Chevron Corp.

Company: Atlas Pipeline Partners (NYSE:APL)

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Brief Overview

  1. Relative Strength 52 weeks = 59
  2. Levered free cash flow = - $195M
  3. Operating cash flow = $115M
  4. Cash Flow 5-year Average = 5.3
  5. Profit Margin = 9.6%
  6. 52 week change = 17%
  7. Operating Margin = 10.5%
  8. Quarterly Revenue Growth = -25%
  9. Quarterly Earnings Growth = 914%
  10. Beta = 1.9
  11. Percentage Held by Institutions = 37.5%
  12. Short Percentage of Float = 3.9%
  13. Sales vs 1 year ago = 42%

Growth

  1. Net Income ($mil) 12/2011 = 289
  2. Net Income ($mil) 12/2010 = 276
  3. Net Income ($mil) 12/2009 = 60
  4. Net Income Reported Quarterly ($mil) = 5
  5. EBITDA ($mil) 12/2011 = 409
  6. EBITDA ($mil) 12/2010 = 128
  7. EBITDA ($mil) 12/2009 = 171
  8. Cash Flow ($/share) 12/2011 = 3.01
  9. Cash Flow ($/share) 12/2010 = 0.87
  10. Cash Flow ($/share) 12/2009 = 1.79
  11. Sales ($mil) 12/2011 = 1303
  12. Sales ($mil) 12/2010 = 936
  13. Sales ($mil) 12/2009 = 904
  14. Annual EPS before NRI 12/2007 = 1.76
  15. Annual EPS before NRI 12/2008 = 2.41
  16. Annual EPS before NRI 12/2009 = -0.13
  17. Annual EPS before NRI 12/2010 = -0.65
  18. Annual EPS before NRI 12/2011 = 1.3

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Dividend history

  1. Dividend Yield = 6.4
  2. Dividend Yield 5 Year Average 03/2012 = 9.45
  3. Dividend 5 year Growth = - 20.00

Dividend sustainability

  1. Payout Ratio = 2.15
  2. Payout Ratio 5 Year Average 03/2012 = 1.46

Performance

  1. ROE 5 Year Average 03/2012 = 6.91
  2. Debt/Total Cap 5 Year Average 03/2012 = 48.1
  3. Current Ratio = 1.10
  4. Current Ratio 5 Year Average = 0.74
  5. Quick Ratio = 0.77
  6. Interest Coverage = 5 .10

Suggested strategy

A great long term play, but consider waiting for a pull back before jumping. Suggested entry points are in the 31-32 ranges.

Company: Marathon Oil Corp (NYSE:MRO)

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Brief Overview

  1. Profit Margin = 11.8%
  2. Operating Margin = 33%
  3. Quarterly Revenue Growth = 1.4%
  4. Quarterly Earnings Growth = - 60%
  5. Beta = 1.4
  6. Percentage Held by Institutions = 1.7%
  7. Short Percentage of Float = 1.2%
  8. 5 year sales growth = -22.6%
  9. Gross Margins = 55
  10. Sales vs 1 year ago = - 79%

Growth

  1. Net Income ($mil) 12/2011 = 2946
  2. Net Income ($mil) 12/2010 = 2568
  3. Net Income ($mil) 12/2009 = 1463
  4. Net Income Reported Quarterly ($mil) = 417
  5. EBITDA ($mil) 12/2011 = 6800
  6. EBITDA ($mil) 12/2010 = 6188
  7. EBITDA ($mil) 12/2009 = 4819
  8. Cash Flow ($/share) 12/2011 = 6.48
  9. Cash Flow ($/share) 12/2010 = 6.56
  10. Cash Flow ($/share) 12/2009 = 4.37
  11. Sales ($mil) 12/2011 = 15282
  12. Sales ($mil) 12/2010 = 73621
  13. Sales ($mil) 12/2009 = 54139
  14. Annual EPS before NRI 12/2007 = 5.43
  15. Annual EPS before NRI 12/2008 = 6.47
  16. Annual EPS before NRI 12/2009 = 1.63
  17. Annual EPS before NRI 12/2010 = 3.65
  18. Annual EPS before NRI 12/2011 = 3.21

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Dividend history

  1. Dividend Yield = 2.4
  2. Dividend Yield 5 Year Average = 3.3
  3. Dividend 5 year Growth = -0.83

Dividend sustainability

  1. Payout Ratio 03/2012 = 0.22
  2. Payout Ratio 5 Year Average = 0.26

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 2.06
  2. ROE 5 Year Average = 15.63
  3. Current Ratio = 0.70
  4. Current Ratio 5 Year Average = 1.19
  5. Quick Ratio = 0.65
  6. Cash Ratio = 0.21
  7. Interest Coverage = 30
  8. Retention rate = 78%

Conclusion

It is still in a corrective phase and appears set to test its recent lows of $41.15. Consider waiting for a test of these ranges before jumping in. It would also be wise to divide your money into 2-3 lots and deploy one lot at a time. Another great strategy would be to wait for a test of $41.50 and then sell in the money puts. Selling in the money puts usually increases your odds of having the shares put to your account. The other advantage of this strategy is that if the shares are assigned to your account, your final entry price should be well below $41.00 as you can subtract the premium from your total cost.

EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings and growth rate estimates sourced from dailyfinance.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above plays meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

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

Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.