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This 12.4% Yielding Stock Is 59% Undervalued

Mar. 07, 2018 6:28 AM ETEnergy Transfer LP (ET)223 Comments


  • It was a very rough year for Energy Transfer Partners with costly delays on no less than three major projects.
  • To raise the capital needed to fund its enormous growth backlog the MLP had to raise a lot of cash via asset sales and issue equity at terrible valuations.
  • However, now it seems that most of these issues are behind it, and in 2017, the MLP was able to once again cover its smaller distribution, even excluding IDR waivers.
  • While the distribution remains frozen for now, management is confident that it can grow once more in the future potentially making ETP a great long-term income investment.
  • That being said, there are numerous risks to keep in mind and that means that while its outlook is improving, ETP remains a high risk stock, at least for now.

Source: imgflip

The goal of my high-yield retirement portfolio is to own a highly diversified group of quality income stocks that generate maximum safe yield, and strong long-term payout growth.

Pipeline MLPs are one of my favorite industries. That's because right now they represent some of the most undervalued high-yield stocks you can find in an otherwise overheated market.

Energy Transfer Partners (ETP) is one America's largest MLPs, and a popular holding for many Seeking Alpha readers. However, 2017 was a horrible time for the partnership, with numerous setbacks arising to the MLP's ambitious growth plans.

This led to the unit price crashing, and the yield spiking to nearly 15% at one point. Not surprisingly, ETP underperformed the red hot S&P 500 but also most other MLPs.


ETP Total Return Price data by YCharts

Still, management made a lot of hard but necessary choices that seem to have finally gotten its turnaround back on track. Of course, Energy Transfer still faces numerous big risks that investors need to understand before buying it.

So let's take a look at this former fallen energy giant to see why I now consider it worthy of a small (1%) portion of my portfolio. More importantly, learn whether or not its potentially bright future and high margin of safety means it fits your needs as well.

A Terrible 2017 BUT Things Look Much Brighter In 2018

Source: Energy Transfer Partners

Energy Transfer Partners is part of the Energy Transfer Empire, with various ownership stakes in other MLPs and energy transportation assets.

Source: Energy Transfer Partners Investor Presentation

The MLP is one of America's largest midstream operators with:

  • 33,000 miles of pipelines;

  • 11.5 billion cubic feet per day of gas gathering capacity;

  • 15 billion cubic feet per day of gas transportation capacity;

  • 3.8 million barrels per

This article was written by

Dividend Sensei profile picture

Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.

He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.

Analyst’s Disclosure: I am/we are long SEP, MPLX. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (223)

20$Bill profile picture
dave 317 just sent me a nasty pm about my N#$$&R friend. not very nice dave 317.
> dave 317 just sent me a nasty pm about my N#$$&R friend. not very nice dave 317.

Boys' there's still time to buy the "NEW" dip. I just wonder sometimes why the stock doesn't blast off, I mean paying almost 13%. Just because the div is paid with borrowed money and money from sales of new stock issuance shouldn't scare off the savy investors and institutional investors.
tyler.freeborn profile picture
Hey, you missed some comment threads to re-post this. And, who are you calling a boy??
Dividend Sensei profile picture
Well no material impact from FERC rule change. But ETP still has a lot that could go wrong.

For one thing this blackswan industry event, while ultimately a fire cracker and not a nuke, is likely to sour investors on the sector as a whole.

ETP would need unit price to double to be able to issue any equity that might be accretive if mixed with low cost debt.
Interesting article.
#CloudsOFLie profile picture
Now how undervalued is it?
Dividend Sensei profile picture
Impossible to tell.

What will be the impact on DCF from the FERC bombshell?

Will ETP get credit downgrade to junk?

Will they be able to complete the backlog now? Without raising crazy diluting equity?

Until ETP comes out with a statement about the ruling it, like all MLPs is much higher risk.

Other than EPD, which has confirmed no material impact, all MLPs are now downgraded one level.

Even blue chips like ENB, MMP and SEP are medium risk, medium risks like TEP are high risk and high-risk are ultra high risk.
tyler.freeborn profile picture
Nothing material. No. Yes. It did. We don't know about the others until they talk about it.
Dividend Sensei profile picture
Yup, great news for ETP.

So far the only material impact I've seen is EEP's $80 million annual hit.

That will decrease ENB's DCF by about 2% a year. So basically not material either.

SEP no material
EPD no material
KIM no material

I expect MLPs are going to have a good day as it appears concerns are far overblown.

ENB just confirmed no material impact.

Hopefully I can get a good day and get me to $100K in equity (about $1000 so away). That is a nice milestone and IBKR stops charging monthly maintenance fee if you get there.

$110K I get portfolio margin and reduce my maintenance requirement 10%.

Should get both within the next 6 weeks or so, maybe 4 to 5 if market breaks my way.
Dividend Sensei profile picture
Interesting approach. You mention letting them expire worthless. So are you selling puts instead of buying them? To earn extra income?
Sometimes but I like using options to lock in sale price when I don’t have money
No just to lock in price I said I don’t mind if they expire worthless as then the security is still in I range which I find value in just have the option to make sure I can buy the security
Dividend Sensei profile picture
Oh I see. That makes sense.
tyler.freeborn profile picture
Did you study at the ee cummings school of grammar?
The current price drop has more to do with the bayou bridge pipeline delay. The court date is next Tuesday for a lifting of the work stoppage ordered by the last partisan judge. The 5th circuit is much more conservative and should rule in ETP's favor, with one Reagan appointee and two Bush appointees being on the three judge panel. http://bit.ly/2G5QeqB
tyler.freeborn profile picture
Doubt that's the reason, Bayou Bridge isn't a project on the scale of Rover or Mariner 2, and both those projects were having difficulty when ETP was over $20 in January. ETP is not a well loved security on the street, it's volatile as all get out.
And tyler it gets worse. The Pittsburgh Post Gazette this morning said Pa. shut down Sunoco/ETP Mariner2 pipeline in Philadelphia after 3 sinkholes were discovered;one 10 feet from an house. Cramer signaled that the dividend was a red flag last night on Mad Money.
tyler.freeborn profile picture
Crammer knows nothing about the company, but I wasn't aware of the Mariner 2 problem. It doesn't appear to be serious, but it will cost a bit of revenue to be lost.
This is a form of racketeering that is morphing into domestic terrorism. FBI needs to squash this, quick.
Dividend Sensei profile picture
Not sure what you mean. Issuing equity at a COE of 20%? Should that be a crime?

If so SEC would be the one involved not FBI.

Personally I have no issue with it. Even if it's high priced equity that's non accretive. Stock market exists to fund growth.

Pass throughs issuing equity is the purest form of what market is for.

Of course it's a terrible idea to sell units at such a price. ETP did it because they had no other choice.

If a project is half done? Then you need to complete it to get any cash flow out of it.
Energy Transfer Partners exploring 'partial' shift to c-corp - CEO
REUTERS 7:52 PM ET 3/7/2018

March 7 (Reuters) - Pipeline operator Energy Transfer Partners(ETP) is considering a partial shift to a C-corp from a master limited partnership, its chief executive said on Wednesday, a move that rivals have made to simplify their corporate structures.

Kelcy Warren, the company's CEO, said in response to a question at the CERAWeek energy conference, "we're certainly exploring at least a partial movement in that direction." Rivals Williams Cos(WMB) and Kinder Morgan(KMI) both have made the move to simplify their corporate structures and lower their cost of capital for new projects.
i am out of nowhere profile picture
Is this news? Reuters made it sound like it's about to happen next Monday.
The end of 2019 is the earliest.
Dividend Sensei profile picture
Yes, this was covered in the article.

IF and WHEN KW can combined ETE and ETP he will do so. But his number one priority is preserving credit rating.

There are 2 ways to simplify. Have ETP buyout IDRs with new units (impossible at current price) or have ETE buyout ETP.

Haven't run the numbers on that, but it's the more likely outcome.

Of course ETE is hardly trading at a good price.

That's what KW was talking about in CC.

IF we can accelerate merger we will. IF it doesn't risk credit rating.

But for now ETP is focused on deleveraging and getting coverage ratio up.

If ex-IDR coverage ratio rises to 1.25 then the unit price will likely be much higher, freeing up KW's options for a potential consolidation.
Dividend Sensei profile picture
This is kind of like market's kremlinology about the Fed.

They parse every word from every FOMC member in regards to interest rates.

Often freak out over nothing new.

They all say the same thing about rates, and KW has been saying the same thing for months about merger.

IF and WHEN market allows it.

That means if the price of both stocks can support it the deal will happen. And not one day sooner.
Pipeline CEOs Worried About Protests -- Market Talk


19:48 ET - Pipeline CEOs say they are under attack. The heads of TransCanada(TRP), Kinder Morgan(KMI) and Energy Transfer(ETP) note protests against pipelines are growing in number, sophistication and lawlessness. Energy Transfer's(ETP)Kelcy Warren said at the CERAWeek conference in Houston that protesters drilled holes in one of his lines, which would have killed them if there had been oil in it. "Talk about people that need to be removed from the gene pool." Meanwhile, Kinder Morgan's(KMI)Steve Kean said protesters tampered with pipeline valves across the US in a simultaneous and coordinated plan. TransCanada's(TRP)Russ Girling added protesters have also hired sophisticated lawyers and are heading to the courts to challenge projects.
"Kelcy Warren said at the CERAWeek conference in Houston that protesters drilled holes in one of his lines, which would have killed them if there had been oil in it."

So what! May not be a nice response but don't tamper with other people's property.
Dividend Sensei profile picture
Sure, there are protesters. And your point is? The biggest risk to all midstream stocks is not completing projects.
Dividend Sensei profile picture
I agree. You never have the right to destroy someone's property.

We're a nation of laws.
ETP has been a disaster on share price of lately. Explain that SA author please!
It's not just ETP....the entire MLP sector has been very weak.
Dividend Sensei profile picture
It's high risk, so share price is very low. Thus why I'm interested.

Margin of safety is very high right now.
Dividend Sensei profile picture
Indeed, over on my ENB/SEP article there is one commenter making the same argument.

If stock is down over 2 years (or in this case at 2 year lows, so flat over 2 years) then obviously it must be a crap company.

Market can't stay wrong forever. Stocks are ultimately valued on cash flows.

ENB is at 11X DCF ETP is at 5X.

Is ENB twice as good as ETP? Sure, but both are undervalued.

Eventually if both execute on growth plans well then price will rise.

If ETP can manage to build entire backlog (through mid 2019) without issuing new equity then that means about 15% growth in DCF.

If price stays the same? Then P/DCF falls to 4.6 and risk is even lower.

The coverage ratio at that point would be about 1.25 or so. High enough to fund internally, but at slower rate.

That's how I view ETP, something that is paying insanely great payout and just needs to maintain it.

Keep funding internally and keep the distribution constant and I get rich over time.
Thank you DS for yet another great article! Off topic: You used to be a fan of Transalta but have not mentioned them in your most recent updates. How do you view them at the moment? Appreciate your thoughts!
Dividend Sensei profile picture
Still a fan and still own them. They are doing great. Strong growth. No worries.
BULLNOVA profile picture
this is how you make a the big money though. you buy this stuff on weakness. ETP will have its day. and frankly i am not concerned by the companies out look in 2050. by then the distribution would have paid for my base investment many times over. i am more concerned about ETP in 2019 and 2020.

i would think that they can now cover the dist and as new project comes online that will be gravy. keep the dist the same. im fine with a steady 11%.
ETE just raised their distribution after their latest earnings release, and ETP the quarter before that. I own a ton of each, but added to ETE since KW owns so much of it and ETE is rated 5-stars by Morningstar below 15.40.
lsuavecito profile picture
>>since KW owns so much of it<<
Ahh, the key to the kingdom.

M* rating really isn't significant.
There was heavy volume today, and some huge block trades posted after the close. Hopefully a large holder was exiting their position for some reason today, and the selling pressure will let up.
Once again, I don't understand why the MLPs, and ETE and ETP, are so weak again today. I just added to my ETE holdings at 15.25. Hopefully Energy Transfer will get a favorable ruling in their Louisiana project halt.
Dividend Sensei profile picture
Who knows. The truth is that with rate exception no one knows why markets do anything in any given day.

Sure media will spin a narrative but it's not usually correct.

I've seen market open lower and media says "X caused stocks to fall!"

Then it pivots and closes up and its "X causes stocks to rise!"
Lol even hindsight 2020 is a blessing I always say
Dividend Sensei profile picture
Very true. The biggest catastrophes can turn out to be blessings, but you don't realize it at the time.
Old Professor profile picture
I hope the company eventually recovers. Right now, it's a "sell" in the March issue of Conrad's Utility Investor.

Selling ETP is not an option for me as I have no earthly idea of how to handle the tax-reporting requirements for an LP with deferred taxes, etc., and I don't have the means to hire an accountant for my tax returns.
HunterKiller89 profile picture
You could hire turbotax...?
Dividend Sensei profile picture
Won't help much if he hasn't saved his K1s or been entering them in every year.
Old Professor profile picture
I'm all right with the IRS as I include the K-1s, which are a puzzlement to me, with every tax return--years and years of them, back to a predecessor company named Penn-Virginia. The only problem would be selling. Leaving my unimpressive number of shares to my children avoids that problem. If the company files for Chapter 11 while I'm living, that may present a tax problem if there's a loss to figure out and claim on Schedule D.
Using some of my speculative funds to dollar cost average into my portfolio. Strictly a long term dividend play. Once they get their projects fully up and producing revenue, this stock is a money generating machine.
Dividend Sensei profile picture
That is indeed the theory.

Of course with current DCR of 1.09 it's far from time to start celebrating just yet.

Luckily it should only go up from here and the higher it climbs the safer payout becomes and the lower the cost of capital falls.
ETP is going to have a couple more blow out quarters. The question is, will they have enough cash around to support the growth projects. If they have to raise equity capital, shares will tank. My suggestion: just slow the growth down a bit, and things will be fine.
Dividend Sensei profile picture
Chicken and egg problem. If they don't put projects in place then the coverage ratio won't rise enough to get unit price up.

Now management claims they are basically funded for 2018.

So that's half the backlog and half the expected cash flow. If true then full year 2018 DCR should come in at about 1.15.

That gives them a little bit of excess DCF to put towards the back half of the growth backlog.

But you are correct, that if the unit price languishes at the current level then they will have to issue equity at insane cost of equity.

The hope is that extra cash flow means they can borrow more, so that partially gets them through 2019, and maybe preferred stock which is less crazy priced.
ETP has turned out to be a "dog." Huge expectations in 2013 and 2014. Not to pick on any particular analyst, but opinions were made back then of long term growth and income.
ETP when off the tracks so to speak in 2015 and has not mustered much of a growth potential since. So, what is new that says we will see $40/share in 12 months or so? Nada.
UBS is just one opinion, where are the rest?
Boubou, why double down on ETP, double up on a winner instead?
Dividend Sensei profile picture
Indeed, many MLPs turned out to be big disappointments. Oil crash taught us all that there is no such thing as a risk free payout.

I was covering MLPs for TMF starting in 2014 and learned a lot from that horror show.
Like many I am looking at a big loss here. On the other hand there is this article, plus a 'most preferred' status from UBS which is expecting a 50% rise for the coming year.
So, nothing loth, I intend to double down at this price.
Dividend Sensei profile picture
Short-term price predictions are meaningless.

Sure it's super undervalued and fundamentals are moving in right direction. But market can hate on a stock for a long time if fears of a cut from consolidation persist.

If stock price rises? That speeds up consolidation. So maybe it won't rise and just sits here for a year.

If so then cost of equity keeps rising.
Thanks for the comprehensive analysis. One question: the article seems to indicate construction is currently halted on the Rover pipeline. However I thought ETP was cleared to continue construction. See article "Energy Transfer's Rover gas pipeline gets OK to drill under Ohio river":
Dividend Sensei profile picture
You are correct. They back on track.

I wrote this article 2 days ago. That news broke the next day.
Have held substantial ETP and ETE positions for over 15 years now. Sometimes it's been difficult, but always interesting.

Retired income/dividend-growth investor
Real-Time Retired Guy profile picture

ETE started trading in Feb 2006.
@ Akaralph

Yeah, coulda been more precise -- have owned ETP since 2004 (as Heritage Propane Partners, later merged into ETP) and ETE since 2008. (Had to go back and look it up.)
Dividend Sensei profile picture
The old Chinese curse, "may you always live in interesting times".
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