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Energy Transfer: Taking Advantage Of The Sell Off, But With Caution

Mar. 11, 2020 8:15 AM ETEnergy Transfer LP (ET)210 Comments
Marel profile picture


  • Oil is in free fall along with the markets.
  • Energy Transfer was hard hit, falling almost 30% during 'Black Monday'
  • The distribution yield has exceeded 15%. The thesis remains intact.
  • I took advantage of the sell off, lowering my average price to just below $9.
  • The worst may not be behind us. Spread your buys over time.

Coronavirus fears in conjunction with oil turmoil has been an explosive combination, rattling financial markets. Following the abrupt withdrawal of Russia from OPEC+ talks, we got an even more surprising move from Saudi Arabia over the weekend, sparking a price war. Instead of an output reduction, we are now facing substantial output increases. Oil crashed. At some point, it was down as much as 30%. In the end, it plunged 24% marking the the worst day since 1991, hitting multi-year lows. Many argue that this oil crash is different (Russia is trying to harm the US shale producers, Saudi Arabia is trying to impose it dominance on Russia, etc - there are too many moving parts. The bullish thesis is that Russia will reach out to Saudi Arabia for a deal. In any case, we have experienced two massive oil crashes within a 5 year period. To be fair, energy never properly recovered following the 2015/16 crash.

The market is in panic mode. For example, Occidental Petroleum (OXY) fell more than 50%!

Source: Seeking Alpha

Even the mighty BP PLC (BP) and Exxon Mobil (XOM) fell by 19.1% and 12.2%, respectively. These are massive drops.

Energy Transfer (NYSE:ET) was not spared, falling almost 30%. I believe that the current valuation represents exceptional value and I am taking advantage of these prices, averaging down.

Source: Seeking Alpha

Besides the massive drop in the oil price, which affects sentiment, not much has changed with ET since my previous article. My core thesis remains intact and it is important to note that the vast majority of ET's revenue backlog is fee-based and not a function of oil prices. At yesterday's closing unit price of $7.37, the dividend yield exceeds 16%. I more than doubled down my position during the 'Black Monday' sell off, bringing my average price to

This article was written by

Marel profile picture
Value-oriented investor focusing on marketable securities, real estate as well as early-stage companies.

Analyst’s Disclosure: I am/we are long ET. 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 (210)

Michael1944 profile picture
I own DHT,Tankers are doing well.
Most like TNK or EUNAV.
georgefelix75 profile picture
Kelcy is one of the least trusted CEO;s in the space so I'm wondering with his buying up all this stock what is the worst scenario end game here?
CincinnatiRick profile picture
@georgefelix75 Kelcy has always been into empire building rather than milking a cash cow. If you invest with him, resign yourself to the fact that you are simply along for the ride. I'm sure he'd be willing to buy any shares you might want to sell at this price. And, on the other hand, if you do not sell, you are right to be concerned as to a possible "worst scenario end game." That apparition is probably making some contribution, unfortunately immeasurable, to the current swoon in the market price.
Justanalysis profile picture
Whatever he does will significantly impact his management team as well as his directors. They own like 4% compared to his 10-11%. What's the upside for them? I'm sure they don't have as deep pockets.
The time to buy stocks is when there is financial blood in the streets. Now is not the time to sell solid investments with good dividend yields. Even if ET were to cut it divided in half, it would still offer a good return. Let me know when the US runs out of a need for natural gas to heat our homes, water heaters, stoves, blast furnaces, etc. In the meantime, enjoy the cheap price of energy and do not rush out to buy an electric vehicle.
Michael1944 profile picture
The world soon will be oversupplied.all storage facilities will be full,companies losing money just to stay afloat.
The U.S Oil Industry needs to shut down completely,start again when Saudi Spat is over, along with the Wu Flue.
Oh yeah, that will really show them and do wonders for the US economy. /s SMH
ChuckXX profile picture
Regarding "ET" and the authors quote of "The distribution coverage ratio for FY2019 was a healthy 1.96 times". Well with the stock right now trading at $4.01 then I would think everybody including the AUTHOR of the article should be backing the truck up and loading up big time.
@ChuckXX -He is a writer, not an investor....
georgefelix75 profile picture
@ChuckXX I understand the midstream space has sold off but ET with all the bullishness etc has done just the opposite. Its definitely not acting well in here......like another shoe to drop?
crrj profile picture
Need a good lawyer to sue this board for not controlling the managements or their risky ways----and for selling their business fraudulently as simply low risk/fee-based -----its farthest from truth---they are at risk for their risky drilling customers----- unreal

uninvestable proved again
The real question with ET is will they be around in 2021? The stock is by far one of the worst performers in the energy sector and I'm sure Kelsey is out looking at who he can buy. This stock has gone nowhere except down in the past three years. Time to exit the train wreck?
Joe de Mencia profile picture
here are their bonds, you tell me: www.boerse-berlin.com/...
The time to buy stocks is when there is financial blood in the streets. Now is not the time to sell solid investments with good dividend yields. Even is ET were to cut it divided in half, it would still offer a good return. Let me know when the US runs out of a need for natural gas to heat our homes, water heaters, stoves, blast furnaces, etc. In the meantime, enjoy the cheap price of energy and do not rush out to buy an electric vehicle.
Idkmuch profile picture
et was 6 or less during 2016, whats going on now is way more of a problem than 2016, no way to dice it
iel76 profile picture
Actually traded at $4 intraday in that timeframe
Idkmuch profile picture
these all goign lower, except for hope a recovery this hasnt cascaded yet
arcticfoxman profile picture
If I was CEO I'd definitely stop expansion and cut Capex while the oil price appears to be a long term low. Next I'd cut the dividend and immediately afterwards buy back units. I don't mean slash dividends but enough to yield 7.5% at current price. That's just the sensible thing to do for the company. Won't help me as that won't of course be 7.5% on my book cost but it's what I'd do as a cold management strategy through the next nasty year.
cyrus trask profile picture
Artic Fox, you evidently have a lot more common sense that the present CEO has.
Cut growth projects, reduce debt, and buy back shares. It is obvious what should be done.
They all need to get Debt/Ebitda to below 3x. That is the prudent and sustainable capital structure.
ET needs to get leverage at least below 3.5 similar to EPD. ASAP .Then it will have value . Kelsy' still has a lot of "wildcatter" in his view of the energy market . He must become Conservative, improve ROI, reduce leverage, increase free cash flow all of which will drive price higher.
crrj profile picture
Let it hit $4--then the company can announce a take-private deal at $12---and be done with it.

KMI CEO seems to have bought another 500K shares---lets go Kelcy--- where your money vs mouth homey? IF--big IF its truly a deal :)
FTTH investment guru profile picture
exactly what Kelcy would love to do and I wouldn't be surprised at all
cyrus trask profile picture
it's there dude. Will it go to 2?
There is currrently no was to price risk
With a yield of 20%, ET is suffering from an "it's too good to be safe" profile. Although it was very encouraging to see the insiders at much higher prices, the uncertainty of whether of not ET can maintain the dividend based on volumes transported in the future has made everyone step back. Yet, at some point, averaging down is an exercise of calculated risk. Is it possible for ET may decrease its dividend by, say 50%? Possible (IMO, not probable), but a yield of 10% at these current prices married with a rebound in the oil markets within the next six months, and ET would give a patient investor an average annual total return of 50% plus over the next two years. And this "eyeball" analysis is assuming a 50% dividend reduction. Anything less than a 50% and you are looking at an even better total return. One could argue that a dividend reduction announcement after some clarity in the immediate future in the oil markets would generate a stock price rally in ET from the price today--as the market would interpret the proactive conservation of capital as a relief that the a bigger dividend cut was not deemed necessary.
Justanalysis profile picture
So how is Kelcy going to explain to investors that he still brought in $8 billion operating cash flow but cut the dividend. Using the decline in the stock price to cut a dividend is not really a very good reason. Cash flow would have to decline by $2 billion just to justify cutting a dividend. (assuming he keeps on using $4 billion for debt repayment and cap ex). What's he going to do with the extra $2 billion? The pipelines are not variable fees, they are committed fees and the oil and gas, if not taken, then becomes an imbalance, but the E&P still has to pay for the gas and oil. Helps to have been an Energy research analyst for almost 25 years. So let's theorize that some E&P's go BK and can't pay. ET management said somewhere (earnings call?) that 90% of their customers are investment grade. So, if 10% of cash flows go BK, that's only $0.80b lost. Where do you lose the other $1.2b? Well, the BK companies assets are then liquidated. Guess who has priority in payment? Pipelines are first, according to the courts. You don't want a bunch of pipelines cutting off payment. What about big companies just not taking their oil or gas committments? Yes, it happens every day. That's why they keep ledgers called imbalance reports. But they still have to pay for their committments. Go back to the late 80's when a few big boys decided not to pay and told their pipelines, and other creditors with take or pay arrangements to pound sand. Guess what, they all lost in court, granted it took almost 10 years in some cases, but they got interest less fees. Some of them got a really bad rap for doing that, so I'd struggle to think they would do it again. But most of those management teams were kids on the school yard when that happened. Perhaps they don't know the lessons learned. Anyhow, I think the risk is pretty low there is not much of that. Putin bit off more than he can chew to get back at Trump for not approving his own pipeline. So Putin thinks he can kill off shale with a price war. He has his hands full now with a price war with the Saudi's. Most of this is drama. Keep an eye on the numbers. Numbers don't lie, unless you fudge them of course, but that's why we have auditors.
Justanalysis profile picture
Your next question is likely, then why is everyone dumping the stock. Some have requirments of their plans not to have this on their books if it drops below a certain amount or risk profile. Obviously companies don't hold these, but hedge funds and others have to dump. Some big holders, like Nuveen may dump just to preserve cash, even if temporarily. They aren't required to ride it down and back up.
Wouldn't it be reasonable to cut some dividends, use that cash to reduce debt to keep leverage ratios below 5x?
Every day someone writes I bought at 9
I bought at 8 7 6. Is 2 next for this garbage. I luckily sold at 12. But I’m still holding mpc and bkr. Getting slaughtered
I can't agree with you more. I have been averaging down with ET and also CNXM and two REITS-NRZ and ABR. I'm in it for the long run.
dividend cut?
How does ET compare with ENBL? Long term.
magichr profile picture
I got it at 6 bucks today got my price point down under 8. i don't know how people avoid buying at these lows.
Idkmuch profile picture
@magichr the debt worries people including prefferen and kicker you get kelecey so itll be lower in this environment

im suprised its at 6
They avoid buying because just maybe this is not a good time to buy. There are such good opportunities out there that far surpasses this questionable equity.
ET is priced as if it was going bankrupt. A true steal in my opinion as it is a survivor in this world of panic selling.
Maybe we get to the point where Treasury starts paying a person for owning the stocks? :)))))
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