Energy Transfer: Things Are Only Getting Better

Aug. 07, 2022 6:17 AM ETEnergy Transfer LP (ET)CQP, KMI, MPLX, MPLXP, OKE, WMB46 Comments

Summary

  • Energy Transfer's management team reported attractive financial performance for the second quarter of the company's 2022 fiscal year.
  • Along with some interesting developments, the company announced an increase in guidance, which should only add value for its investors.
  • Given how cheap shares are, the company offers tremendous upside potential from here.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Pumped-storage power station with three pipelines

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Although it may seem too good to be true, the picture just keeps getting better for midstream firm and pipeline operator Energy Transfer (NYSE:ET). After the market closed on August 3rd, the management team at the company announced financial results covering the second quarter of its 2022 fiscal year. In addition to boasting some rather strong cash flow figures, the company increased guidance for the year yet again. This comes on the back of a prior increase in guidance when the company reported results for the first quarter of the year. Add on top of this exactly how cheap shares are today, both on an absolute basis and relative to similar firms, and it stands to reason that further upside for shareholders should be significant moving forward. Overall, I do believe that Energy Transfer is one of the few companies on the market that is worthy of a ‘strong buy’ designation at this time.

The picture just keeps improving

In life, I have come to be wary of the next shoe dropping. When things are going particularly well, I keep an eye out for what might come out of left field and negatively impact my life. But sometimes, that shoe doesn't drop. At times, including when it comes to investing, the picture just keeps getting better. This is precisely how I feel today about recent performance and guidance provided by the management team at Energy Transfer. To start with, let's cover some of the headline topics at management revealed. Most important would be the cash flow picture of the business.

Historical Financials

Author - SEC EDGAR Data

During the latest quarter, DCF, or distributable cash flow, came in strong at $1.88 billion. That represents an increase of 34.8% over the $1.39 billion generated the same time one year earlier. Another profitability metric that fared particularly well was EBITDA. According to the company, this metric came in at $3.23 billion. That's 23.4% above the $2.62 billion generated the same time one year earlier. Operating cash flow of $2.35 billion beat out the $2.01 billion seen one year earlier, while an adjusted version of this that ignores changes in working capital would have seen the metric rise from $1.88 billion to $2.77 billion. Despite this strong performance to the quarter, results for the first half of the year did weaken. For instance, DCF in the first half of the year came in at $3.96 billion. That's down from the $5.31 billion generated one year earlier. Meanwhile, EBITDA declined from $7.66 billion to $6.57 billion. However, it is worth noting that the first quarter of 2021 was impacted in a significantly positive way by inclement weather. Similar declines occurred with both operating cash flow and adjusted operating cash flow for the same reason.

Historical Financials

Author - SEC EDGAR Data

The strong performance for the company and the latest quarter was driven by some mixed results. Its intrastate transportation and storage segment, for instance, saw profitability tick down by 2.7% year over year, with a higher volume of natural gas being transported and higher revenue associated with it more than offset by an increase in costs. But this particular segment was definitely an outlier. All other operating segments of the company performed better year over year. And the best of these was undoubtedly the midstream segment. The segment level EBITDA for the firm came in during the latest quarter at $903 million. That's 89.3% higher than the $477 million reported just one year earlier. There were multiple factors behind the success of this segment during the quarter. For instance, gathered volumes managed to rise by 39.8%, while the quantity of natural gas liquids produced rose by 22.3%.

Revenue for that segment rose by 129.6%, with costs admittedly impacting the company to some degree as cost of goods sold rose by 155.5%. Management attributed this strong performance to a few key items. For instance, the company benefited to the tune of $137 million from non-fee-based margin thanks to favorable natural gas prices and favorable natural gas liquids prices. The company also benefited to the tune of $146 million from non-fee-based margin thanks to its acquisition of Enable in December of last year. Fee-based margin associated with that same acquisition added $223 million to the company's bottom line, with some of this being offset by higher operating costs and selling, general, and administrative expenses.

There were other interesting developments. For starters, management decided, in early August of this year, to enter into an agreement to acquire Woodford Express LLC, a Mid-Continent gas gathering and processing system located in the heart of the SCOOP play that has 450 MMcf per day of cryogenic gas processing and treating capacity and over 200 miles of gathering and transportation lines. This particular acquisition Fits very nicely with the company's current assets because it is already connected to Energy Transfer’s pipeline network. The overall cost for the acquisition is $485 million. And as I reported in a prior article, the company has also recently increased its distribution for common shareholders and intends to continue doing that until it reaches its goal of $1.22 per share each year.

Thanks to the strong fundamental performance for the company and management's current outlook, management has decided to increase its overall guidance for the 2022 fiscal year. Previously, the company thought that EBITDA would come in at between $12.2 billion and $12.6 billion for the year. That number has now been increased to between $12.6 billion and $12.8 billion. If we assume that this increase will also apply to other profitability metrics, then DCF should come in this year at around $8.26 billion. Adjusted operating cash flow, which strips out non-controlling interests and preferred distributions, should be roughly $9.36 billion. And true free cash flow, which I define as the adjusted operating cash flow minus sustaining capital expenditures, should be around $8.68 billion.

Trading Multiples

Author - SEC EDGAR Data

Taking these figures, we could see that shares of the business are incredibly cheap. The price to adjusted operating cash flow multiple is 3.7. The priced true free cash flow multiple is only marginally higher at 4, while the price to DCF multiple should come in at 4.2. The EV to EBITDA multiple, meanwhile, should be roughly 7.7. As part of my analysis, I compared two of these metrics to the metrics of five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 7.3 to a high of 9.9. Using the EV to EBITDA approach, the range is from 9.6 to 11.5. If we were to average these numbers out and apply them to Energy Transfer, it would imply upside for shareholders from today of between 89.2% and 128.3%. That's on top of the 8.2% yield the company currently offers and the 10.8% forward yield once the company achieves its prior target on its distribution.

Company Price / Operating Cash Flow EV / EBITDA
Energy Transfer 3.7 7.7
MPLX (MPLX) 7.8 9.6
ONEOK (OKE) 9.9 11.1
Kinder Morgan (KMI) 8.1 9.7
The Williams Companies (WMB) 9.3 10.5
Cheniere Energy Partners (CQP) 7.3 9.7

Takeaway

All things considered right now, I have a difficult time believing that Energy Transfer deserves to trade where it is right now. It truly is a quality operator that is trading at incredibly low levels. The health of the company appears robust and, absent anything unexpected occurring, I do think that significant additional upside is on the table for shareholders. Because of this, I have decided to keep my ‘strong buy’ on the company for now.

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This article was written by

Daniel Jones profile picture
23.72K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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.

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