Throughout 2022, one of the biggest storylines in the marketplace has been the pace of inflation. It’s been reflected in rising prices across the board all the way to the consumer level, and one of the places it has been most clearly seen is the price of crude. West Texas Intermediate (WTI) crude, which acts as the benchmark for oil produced throughout North America started the year a little below $70 per barrel, and by mid-February had risen to just a little below $90. Increasing focus on Eastern Europe late last month, and of course in the last week as Russia escalated geopolitical tensions into full-scale war with Ukraine have accelerated the rise in crude prices in parabolic fashion, with WTI sitting around $110 per barrel just a week into the conflict.
In the Energy sector, there are a lot of different industries to think about, with a wide range of types of businesses related to it. It’s easy to correlate Energy to crude oil, because that is the single commodity that most of the companies in the sector are tied to in one way or another; but there are a lot of other product types that make up a significant part of this sector’s make up. One of those is natural gas liquids (NGL), which like crude itself have uses in a number of other segments of the economy such as petrochemicals, home heating, cooking and refrigeration, synthetic rubber for tires, vehicle fuel blends and more.
Natural gas, and NGL’s have their own place in the current economic and geopolitical climate, as Russia is the world’s leading producer and exporter of natural gas and has used its dependence on that commodity as a justification for its aggression, since a major portion of the pipelines that transport its natural gas to the rest of Europe run through Ukraine, and therefore have made the two countries reluctant but necessary partners. No matter your view of events unfolding in that part of the world, there is no question that the longer the conflict continues, the greater the impact it will continue to have on worldwide energy supply and therefore is likely to keep energy prices high. That also means that for North America as well as every other part of the Western world, other sources for natural gas will come at a premium.
NGLs are an area that has experienced a growing level of exploration and production in the U.S., which means that companies that operate in this segment of the Energy sector, along with standard crude operations, have a useful second business leg to work from, and that I expect to provide a significant tailwind for the foreseeable future. Economic activity in the U.S. remains high, which along with the global pressures mentioned above means energy demand should also stay elevated for natural gas and NGLs. Many of the most interesting companies in this sector that have found a way to navigate difficult conditions of the last two years did so in part by figuring how to operate successfully even amid depressed commodity prices, which means that healthy demand should boost these company’s profitability and long-term results even more.
Energy Transfer LP (ET) is a mid-cap company in the oil, gas & consumable fuels industry that focuses a primary portion of its business in natural gas assets, including storage facilities and transportation assets. This is a company whose balance sheet has been among the most healthy in its industry, even during the pandemic. After more than doubling in price from its 2020 low point at around $5 by July of last year, the stock dropped back into a short-term downward trend that found a trend support low point in December. Increasing crude and natural gas prices from that point have pushed the stock back into a new upward trend, with the stock now pushing a little above $10 as of this writing. The question, of course is whether the company’s fundamental strength supports the notion that the price could go even further, or whether the stock’s useful, value-driven opportunity has already been played out.
Fundamental and Value Profile
Energy Transfer LP owns and operates a portfolio of energy assets. The Company’s operations include complementary natural gas midstream, intrastate and interstate transportation and storage assets; crude oil, natural gas liquids (NGL) and refined product transportation and terminalling assets; NGL fractionation; and various acquisition and marketing assets. Its segments include intrastate transportation and storage, interstate transportation and storage, midstream, NGL and refined products transportation and services, crude oil transportation and services, investment in Sunoco LP, investment in USAC, and all other. Through its intrastate transportation and storage segment, the Company owns and operates natural gas transportation pipelines and three natural gas storage facilities located in the state of Texas. Its intrastate transportation and storage segment focus on the transportation of natural gas to markets from various prolific natural gas producing areas. ET has a current market cap of $31.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings were 52.63% higher, while sales increased almost 86%. In the last quarter, earnings improved by 45% while sales were almost 12% higher. The company’s margin profile over the last twelve months showed Net Income was 7.68% of Revenues, but weakened to 3.93% in the last quarter.
Free Cash Flow: ET’s Free Cash Flow is sign of significant strength, despite the weakening Net Income profile; over the last twelve months, this number was about $8.3 billion. That marks an improvement from $8.2 billion in the quarter prior, and about $6.5 billion a year ago. The current number translates to an impressive Free Cash Flow yield of nearly 25%. The strength in this number implies that the company’s ability to service its debt, maintain its dividend and keep business growing remains very healthy even though cash and liquid assets are limited.
Debt to Equity: ET has a debt/equity ratio of 1.47, which is generally higher than I prefer to see, but also not unusual for stocks in this industry. As of the last quarter, cash and liquid assets were $336 million versus $49 billion in long-term debt. Liquidity from cash and liquid assets is limited, however the company’s strong free cash flow is a good indicator of the company’s ability to service its debt without a problem.
Dividend: ET pays an annual dividend of $.70 per share, which at its current price translates to a dividend yield of about 6.67%. The company also announced an increase in its dividend payout during its last earnings report, from $.61 to the current level. An increase in dividend distributions is a strong indicator of management’s confidence in its long-term approach.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $14 per share, which suggests that ET is nicely undervalued, with 34% upside from its current price. It is also worth noting that at the end of the third quarter of 2021, this same analysis put ET’s long-term, fair value target at around $12.75 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity for ET. The red diagonal line traces the stock’s upward trend from April 2021 at around $7.30 to its June high at around $11.60; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After tracing all the way back to around $8 in December, the stock picked up a lot of bullish momentum to start the new year, pushing above all three major retracement lines and more recently breaking above resistance at around $10 .25 to mark current support around that level. Immediate resistance should lie at around $11.60, near the stock’s 52-week high. A drop below $10.25 has limited downside, with the 38.2%, 50% and 61.8% retracement lines sitting at around $10, $9.50, and $9 respectively. That means that a truly bearish reversal couldn’t be confirmed unless the stock reverses and drops below $9, in which case the stock should find next support at around $8 per share. The stock appears to have about $1.50 of near-term upside to its yearly high, with the stock’s current bullish momentum making a push to that level look likely.
Near-term Keys: ET’s strong pattern of healthy Free Cash Flow over the last year is a strong sign of fundamental strength, with increases in cash and liquid assets also being useful, limited as they are. I do think that the decline in the last quarter’s Net Income is a red flag that bears watching, but doesn’t invalidate the company’s value proposition. If you prefer to focus on short-term trading strategies, you could use the stock’s current momentum to consider buying the stock or working with call options, using the stock’s June high at around $11.60 as a practical near-term bullish target price. With limited downside, I would hesitate to consider shorting this stock or buying put options; however a drop below $9 might provide the right signal for a bearish trade, with $8 acting as an initial, bearish profit target.