Energy Transfer LP: A Definite Candidate For 2022

Summary

• Revenues for the 3Q21 were $16,664 million with a net income of $635 million or $0.20 per diluted share.
• ET's percentage of worldwide NGL exports has nearly doubled over the past 18 months to almost 20%.
• ET has corrected about 50% from its high in June and now presents a much better valuation, making the stock attractive.
• I recommend accumulating ET at or below $8.20.
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Introduction

Energy Transfer LP (NYSE:ET) -- owned by billionaire Kelcy Warren -- is a publicly-traded limited partnership classified as an energy-related services provider.

Its primary operations are midstream natural gas, intrastate, interstate transportation and storage assets, crude oil, natural gas liquids ("NGL"), and refined product transportation. The company owns and operates more than 114k miles of pipelines throughout major producing regions and markets in 41 US states.

The company owns and operates one of the largest and most diversified portfolios of energy assets in the United States and is active in all major domestic production basins, making the stock one of the industry's best choices.

ET also owns Lake Charles LNG Company, the general partner interests, the incentive distribution rights and 28.5 million shares of Sunoco LP (SUN), and the general partner interests and 46.1 million shares of USA Compression Partners, LP (USAC).

On December 2, 2021, Energy Transfer announced that it had completed the acquisition of Enable Midstream.

Energy Transfer now owns and operates more than 114,000 miles of pipelines and related assets in all of the major U.S. producing regions and markets across 41 states, further solidifying its leadership position in the midstream sector.

CEO Tom Long said in the conference call:

Switching gears to an update on the acquisition of Enable Midstream Partners, which will provide increased scale in the Mid-Continent and Ark-La-Tex regions and improved connectivity for our natural gas and NGL transportation customers. We expect the combination of Energy Transfer's and Enable's complementary assets to allow us to provide flexible and competitive service to our customers as we pursue additional commercial opportunities utilizing our improved connectivity and increased footprint.

1 - Q3 Snapshot

On November 3, 2021, Energy Transfer LP reported net income attributable to partners for the three months ended September 30, 2021, of $635 million compared to a loss of $782 million in 3Q20.

Adjusted EBITDA for the three months ended September 30, 2021, was $2.58 billion compared to $2.87 billion for the three months ended September 30, 2020.

Distributable Cash Flow DCF attributable to partners, as adjusted, for 3Q21 was $1.31 billion compared to $1.69 billion for the three months ended September 30, 2020.

During 3Q21, the company repaid roughly $800 million in debt for a total of $6 billion repaid in 2021.

Source: Presentation

2 - Stock Performance

ET is up 33% on a one-year basis. However, the stock has been down since its record high in June 2021. ET has outperformed one of its main competitors, Enterprise Products Partners LP, up only 12% in the same period.

Data by YCharts

3 - Investment Thesis

The investment thesis for Energy Transfer is relatively straightforward. I consider ET a solid long-term investment particularly adjusted to dividend-oriented investors interested in a business model targeting the domestic distribution and storage of natural gas liquid.

The company is paying a high-level dividend of 7.41% (versus EPD with 8.20% now), which is considered sustainable. Of course, there are always risks attached to such a business. Still, the solid balance sheet shows a steady free cash-flow-generation business model, and it is basically what investors should consider before any cherry-picking considerations. Another critical element is the debt level and its ability to reduce it.

Another nuisance when you want to invest in such a sector is to avoid getting immersed into technicalities, stay above water and separate the wheat from the chaff. Too many technicalities are a curse that makes you focus on the tree and blinds you from the forest. Avoid playing the CEO and look at what is crucial.

Furthermore, ET has retraced about 50% from its highs in June and now presents a much better valuation, making the stock attractive.

One concern that will take away some precious cash is the recent court decision to force Energy Transfer to pay $410 million-plus interest for scuttling a $33 billion merger with rival Williams Cos. over a tax flaw in the deal.

However, while the long-term investment thesis is secure, I recommend trading LIFO about 25%-35% of your total position due to high volatility in this ever-moving segment. You will take full advantage of the sector cyclicality while keeping a long-term core position for a much higher target and getting paid in the process.

CEO Tom Long said in the conference call:

Operationally, our NGL transportation and fractionation and NGL refined products terminals volumes reached new records during the quarter, largely driven by growth in volumes, beating our Mont Belvieu fractionators and Nederland Terminal. As the market continues to recover, we are well positioned to benefit from increasing demand and higher margins.

Energy Transfer LP - Financial table 3Q21 - The raw numbers

ET	3Q20	4Q20	1Q21	2Q21	3Q21
Total revenues in $ million	9,955	10,034	16,995	15,101	16,664
Net Income in $ Million	-782	636	3,288	626	635
EBITDA $ Million	1,121	2,442	5,259	2,496	2,485
EPS diluted in $/share	-0.29	0.19	1.21	0.20	0.20
Operating cash flow in $ Million	2,296	1,906	5,155	2,005	2,263
CapEx in $ Million	1,138	1,100	698	731	617
Free Cash Flow in $ Million	1,158	806	4,457	1,274	1,646
Total cash $ Million	275	367	355	282	313
Long-Term debt in $ Million	51,445	51,438	47,735	46,286	45,471
Dividend per share in $	0.1525	0.1525	0.1525	0.1525	0.1525
Shares outstanding (diluted) in Million	2,696.6	2,699.2	2,708.6	2,717.8	2,720.6
Oil Production	3Q20	4Q20	1Q21	2Q21	3Q21
Natural Gas transported BBTu/d	12,185	-	-	-	12,335
NGL Transportation volume MBbls/d	1,493	-	-	-	1,803
Crude oil transportation MBbls/d	3,551	-	-	-	4,173

Click to enlarge

Sources: EP release

Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, An Oil And Gas Production

1 - Total revenues and others were $16,664 million in 3Q21

Revenues for the 3Q21 were $16,664 million with a net income of $635 million or $0.20 per diluted share. It was a massive improvement from the 3Q20.

2 - Free cash flow was $1,646 million in 3Q21

Note: Free cash flow is cash from operations minus CapEx.

Trailing twelve-month free cash flow is now $8.183 billion, and free cash flow for 3Q21 was $1.646 billion.

3 - Net debt was $45.16 billion in 3Q21

Cash and cash equivalent were $313 million in 3Q21, up 11% sequentially, and LT debt (including current) was $45.471 billion.

• During the third quarter of 2021, the Partnership reduced outstanding debt by $815 million, utilizing cash from operations. Year-to-date in 2021, ET has reduced its long-term debt by approximately $6.0 billion (please see graph above).
• As of September 30, 2021, the Partnership's $6.00 billion revolving credit facilities had an aggregate of $5.37 billion of available capacity, and the leverage ratio, as defined by the credit agreement, was 3.15x.
• For the full year of 2021, ET expects its adjusted EBITDA to be $12.9 billion to $13.3 billion, and its growth capital expenditures to be approximately $1.6 billion.

However, I find the debt too high and will be more comfortable with a net debt at or below $35 billion, which is still a far-fetched goal. Just for comparison, Enterprise Products Partners L.P.'s net debt is $27.3 billion.

Technical Analysis (Short Term) And Commentary

Note: The chart is adjusted for the dividend.

ET forms a descending wedge pattern with resistance at $8.30 and support at $8.10.

The pattern reaches its apex, suggesting a strong move up or down with a line-crossing soon. In general, the descending channel pattern shown above is usually bullish. However, it will be entirely up to the underlying commodities' momentum price.

The trading strategy is to sell 30% to 35% of your position between $8.30 and $8.8 with a potential new higher resistance at $9.10 in case of a breakout.

It is reasonable to start accumulating below $8.15, and I have started a position on Friday. If the sector turns bearish in the next few weeks or months, the next lower support is $7.50.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ET either through stock ownership, options, or other derivatives. 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.

Starting a long-term position at below $8.20.