Energy Transfer Stock: Remarkable Dividend Yield
Presentation of Energy Transfer LP and my investment thesis
Energy Transfer Limited Partnership (NASDAQ:HEY) has strongly outperformed in this year’s bear market. With its high volume of recent insider buying activity, this may be another indication of a potential move. upper. Energy Transfer is a company that operates as an intermediate oil company with terminals primarily in Texas, Louisiana and part of the Northeast. It is an intermediate oil company responsible for managing the pipeline and gathering facilities that move gas from the well (upstream) to businesses and consumers (downstream).
There have been major purchases of CEO Kelcy Warren and recent purchases of CFO Bradford Whitehurst and directors Richard Brannon and Michael Grimm. These purchases have all been in the $10-12 range. Considering these executives bought stocks earlier in the year at around $7.50/share, which is well below current levels, investors could see potential for another upside move.
Not only does ET have strong fundamentals/valuations relative to industry averages, but it also pays a large dividend, along with that wave of insider confidence. Given all of this recent buying activity, especially at high volume, it makes me more confident to potentially invest in ET at these levels. Going forward in this analysis, I will support my purchase thesis with the many strengths that I see in this company compared to its peers, as well as certain risks for my thesis.
How Energy Transfer excels in front of its peers in the energy sector
Some peers not only in the energy sector, but also in the oil and gas transportation and storage industry, include Cheniere Energy Inc (NASDAQ:LNG), Kinder Morgan Inc. (NASDAQ:KMI) and ONEOK Inc (NASDAQ:okay). I will show a full analysis comparing Energy Transport LP to these competitors and reiterate why I think ET shines above these names. I will use valuation ratios and compare the dividend yields of each peer to get a general sector and industry comparison.
As you can see above, Energy Transfer excels in the price-earnings ratio category, with a multiple that is almost half of the ratios of its peers. Although there was a slight increase in ET’s PE ratio due to its outstanding equity performance in 2022, it remains cheaply valued and enjoys a fairly strong B+ valuation rating by Seeking Alpha. Energy Transfer has done an outstanding job of securing contracts and increasing net profit margins, making its valuation more attractive. The execution of six long-term liquefied natural gas SPAs to supply approximately 8 million tonnes of LNG per year, with first deliveries to begin as early as 2026 on SPA terms ranging from 18 to 25 years. This will allow ET to penetrate the middle market even stronger and allow management to target higher distribution yields and deleveraging.
Another metric to which ET is extremely undervalued is its EV/EBITDA multiple. Above you can see the value achieved by Energy Transfer compared to its industry peers. ET remains one of the most valuable companies in the energy sector using the EV/EBITDA ratio, which illustrates the company’s ability to reliably turn sales into earnings. While executing on growth plans, they have also been able to significantly remove debt from balance sheets, delivering a stronger EV/EBITDA multiple.
Competitive dividend yield
Energy Transfer noted that they now had $1.88 billion in distributable cash flow in Q2 2022, a 35% year-over-year increase. Because Energy Transfer has been able to strengthen its free cash flow recently, they are now focused on increasing yield and are targeting between $0.90 and $1.20/share in annualized returns. This is a significant number considering the current rate of inflation in America and around the world. ET’s current yield of around 7% provides an excellent hedge against inflation while providing robust growth strategies in the liquefied natural gas space. Average yields have been on a downward trend since 2019; however, the company primarily targeted debt reduction during these periods and allocated most of its FCF to deleveraging its balance sheet.
Another significant step Energy Transfer took toward deleveraging was to use cash proceeds from its sale of Energy Transfer Canada. They also used most of their free cash flow to target deleveraging before increasing their already excellent performance.
- “In March 2022, the Partnership announced a definitive agreement to sell its 51% stake in Energy Transfer Canada. The sale is expected to generate cash proceeds for Energy Transfer of approximately $272 million (based on the March 31, 2022 exchange rate), subject to certain purchase price adjustments, and to reduce the consolidated debt of the Partnership of approximately $450 million. The transaction is expected to close by the third quarter of 2022.”
- “Energy Transfer generated enough cash to cover its high yield distribution by more than three times. Energy Transfer repaid $290 million of debt in the first quarter, adding to last year’s $6.3 billion debt reduction. Meanwhile, the company has taken another step towards improving its balance sheet by agreeing to sell Energy Transfer Canada in a transaction expected to close later this year.
Recent Large Insider Buys from Energy Transfer Executives
Energy Transfer execs have expressed extreme optimism towards the stock recently, with multi-million+ dollar buys. Especially CEO Kelcy Warren, who bought more than $35 million worth of stock last week. What makes me more bullish on this stock is that these executives listed below bought blocks of shares long before the start of 2022, when the stock was worth around half its current price. ET’s list of recent purchases includes:
- $36,011,462 in CEO shares on September 12 and 13, bringing Warren’s total stake to 52,578,477 shares.
- $115,000 in CFO stock on 9/8, bringing the total number of shares in Whitehurst to 1,047,488.
- $1,334,660 in shares of Richard Brannon (director) from 7/14 to 7/15, bringing his number of shares to 500,000.
- $5,657,026 in shares of Michael Grimm (Director) on 4/6, bringing his number of shares to 500,000.
As noted from the Finviz source below, there were no insider selling, only buying, showing the attitudes of some of the most important/significant people within Energy Transfer LP. The detailed image above depicts the volume size of recent insider buying. Insiders hold about 13% of the float, which is a remarkable amount, as well as the large share of shares held by institutions. Holding 52,578,477 shares valued at around $620,000,000, the CEO owns around 1.67% of the shares, and that number continues to grow exponentially, which is a good sign.
Potential Threats of Investing in Energy Transfer
- Extreme dilution over a 10 year period. It has slowed down a bit lately, but the number of shares outstanding continues to increase to cover its debt burden. There were a few stock splits in 2014 and 2015; however, this does not take into account all dilutive practices.
- Total debt continues to grow, posing a threat in a high interest rate environment. Although they are targeting deleveraging and have done a decent job, their high-yielding dividend and soaring interest rates are weighing on ET’s debt burden.
- Dividend yield decreased by around 50% from 2019 to 2021 due to high leverage, but dividend yield started to rise again in 2022. One has to wonder if they have a higher yield instead or if the he company continues to cut the dividend to pursue its deleveraging strategy.
- A global push towards clean energy alternatives and sanctions for companies in the oil and gas rigging sector will likely continue, putting companies in the oil and gas transportation industry at risk.
Although Energy Transfer LP has considerable debt, which is very unfavorable in a late cycle economy with generally higher interest rates, I continue to believe that Energy Transfer will be able to pay a solid dividend and to repay a significant portion of its debt in the coming years with their free cash flow. Energy Transfer executives have also shown great confidence in owning the shares, with the CEO buying more than $35,000,000 worth of stock last week. The European energy crisis can be a huge opportunity for energy transfer. With gas supplies from Russia to Germany at an all-time low, ET can potentially be a vital part of delivering liquefied natural gas to Europe to solve the energy crisis as a mid-tier player. Finally, ET’s dividend yield is desirable for income investors, as the current yield almost matches the inflation rate in the US (CPI 8.3% YoY), only about 100 basis points below the August CPI print. Maintaining this high yield is an excellent hedge against inflation while providing investors with growth opportunities, which are rare these days. Ultimately, I view Energy Transfer as a stock with pretty decent short-term upside and a great amount of long-term upside if they can prove they’re still operating at high margins and allocating FCF to new growth projects and debt reduction.