Last week, I bought 14 shares of Energy Transfer Partners (NYSE:ETP) for a cost basis of nearly 500 dollars. It increases my stake in the company to 79 shares. It has a relatively high dividend yield of over 12 percent, in addition, it boasts a high PE ratio which is seen in many Master Limited Partnerships (NYSEARCA:MLPS).
I purchased 14 shares of Energy Transfer Partners on 04/20/2016 for $35.03 per share.
Energy Transfer Partners, L.P. is a master limited partnership owning and operating one of the largest and most diversified portfolios of energy assets in the United States. ETP has natural gas operations that include approximately 24,000 miles of gathering and transportation pipelines, treating and processing assets, and storage facilities.
ETP also acquired the general partner interests, 100% of the incentive distribution rights, and a 32.4% limited partnership interest in Sunoco Logistics Partners L.P. (NYSE:SXL), which operates a geographically diverse portfolio of crude oil and refined products pipelines, terminalling and crude oil acquisition and marketing assets.
In January 2015, Energy Transfer Partners announced it would acquire its affiliate Regency Energy Partners for around $11 billion.
ETP also holds a 70% interest in Lone Star NGL, a joint venture that owns and operates natural gas liquids storage, fractionation and transportation assets in Texas, Louisiana and Mississippi. In addition, ETP holds controlling interest in a corporation (ETP Holdco Corporation) that owns Southern Union Company and Sunoco, Inc. ETP's general partner is owned by ETE.
Energy Transfer Partners Fundamentals
Energy Transfer Partners is rather a solid, diversified company with a recent slump due to the hard hit it took from falling crude oil prices. As oil begins to rebound in the coming years, ETP should provide a nice source of dividend income to the Financial Independence Fund (NYSE:FIF).
The revenue growth put forth by the company has declined over the last year at a pretty rapid pace. It went from $48 billion to $55 billion from 2013 to 2014, however, it dropped to 34 billion in 2015. The revenue should plateau at this point and begin to gradually increase in the coming years as oil prices begin to stabilize and increase.
Gross profit margins peaked in 2012 and were around 37 percent, but then rapidly declined over the next few years. According to graphical analysis of the stock, gross profit margins have increased over the last two years from around 9 percent to 18 percent at the end of the 2015 year. It is truly remarkable when a company can increase profit margins in difficult times when oil is at five year-lows. It's assets have increased from 17 billion to 65 billion over the last few years. The earnings have tripled over the last three years from 456 million to 1.4 billion.
Earnings per share, however, was a disappointment in December 2015. Earnings per share at last report was 0.02, but was forecasted at 0.42 cents per share. The revenue generated in that quarter was 5.8 billion down from the forecasted 8.94 billion.
Energy Transfer Partners, is still a king in the pipeline industry. Even though the latest earnings per share was a disappointment, it can still provide great returns for any investor, especially as crude oil prices rise and the projects underway are complete. Moreover, the stock has increased its dividend for the past 3 years, which isn't jaw dropping, but it pays a nice dividend of $1.055 per quarter. The current ratio or liquidity ratio is 1.14 which is relatively low and indicates that ETP has good financial strength to pay short term financial obligations. The current dividend yield is around 12.2 percent.
Profitability metrics are slightly lower than the sector. Currently, the firm has averaged a net margin of 0.79% and return on equity of -6.24%. At the time of the post, these values appear lower than the sector averages, but in the coming months I foresee these values increasing once the commodity prices rebound and transport volumes increase.
I've long been debating about adding more oil sector shares in my portfolio. I have chosen this stock because it seems to have great profit margins, increasing revenue with increasing assets during a time when oil is nearing its bottom. ETP is highly diversified with its new acquisitions and it pays a strong dividend.
First, ETP is greatly sheltered from the price of crude oil, as it provides a fee based service for transportation, processing and storage of the product.
Second, ETP is expanding and acquiring new ventures such as Regency Energy Partners in 2015 and Sunoco in 2012.
Third, ETP pays a nice hefty dividend and has been increasing it for the last three years.
Fourth, ETP is working on a 9 billion dollar project and looking to put SIX more pipelines into working order by the end of 2016. They project they can maintain 4-17 percent increases in volumes compared to last year as the new projects are put in operation.
Fifth, As debt is paid down in the next few years from higher profit margins as a result of higher crude oil prices and higher transport volumes it should be reflected in the return on investment through higher dividends and capital appreciation.
Energy Transfer Partners is in the oil sector and it is highly volatile. This makes it more riskier than a lot of the consumer-goods companies. This stock operates with huge debt, however, falling oil prices will decrease revenue and in return lower profit margins. Lower oil prices will also provide interference in the company's expansion plan if it decides to purchase other subsidiaries or start new projects. Another dynamic which affected the share price was the ongoing merger failure with Williams Companies.
Energy Transfer Partners P/E ratio is extremely high, but the good news is this doesn't tell the entire story because it's a Master Limited Partnership. One ratio we'll look at is P/DCF ratio. ETP is approximately 8x. The value indicates that the share price is not as high as suggested by the PE ratio. Therefore, the company compared to others in the sector has more economical space to grow. This especially holds true if the company implements the other new pipelines into use by the end of the 2016 fiscal year.
Overall, I think Energy Transfer Partners is a pipeline company with a proven track record. I chose this company because they have increased dividends, while increasing assets and revenue simultaneously. Furthermore, ETP stands out in the sector when it comes to the addition of new subsidiaries and projects. I think as the 9 billion dollar pipeline project ends in the next year or so and oil prices increase, it should be able to divert more cash flow to pay down debt; further increasing profit margins. Currently, I think you can say that ETP is spending money now, so it can be poised to reap the rewards in the future.
These purchases add $14.77 to my quarterly dividend income or $59.08 to my annual dividend income based on the current $1.055 quarterly dividend.
Full Disclosure: Long ETP
Some values are approximations
I used a free trade from Scottrade which lowers cost basis. I have 47 free trades left.
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Disclosure: I am/we are long ETP.