Energy Transfer: Undervalued MLP Poised for Growth in the Energy Infrastructure Sector

Large Caps 7 replies 0 votes 1170 views Tags:  acquisitionscash flowdebt reductionEnergy Transferfinancial performancemidstream operatorMLPUndervalued
anuv javier 7 months

Energy Transfer (ET) has emerged as the largest midstream operator in the United States, making significant strides in its growth and financial performance since 2020. Despite facing challenges, including a distribution reduction, ET has successfully acquired three companies, increased its cash flow, reduced its debt, and restored its distribution. These achievements have positioned ET as an undervalued asset in the market.

Master Limited Partnerships (MLPs) like ET have garnered favor among income investors due to their generous distribution of income to unitholders. ET, in particular, stands out as a company with physical assets crucial to society's functioning. The energy infrastructure industry, while not grabbing headlines, plays an essential role in sustaining our modern way of life. Given the company's financial performance and comparison to its peers, there is reason to believe that units of ET are currently undervalued and offer substantial potential for growth.

Since the distribution reduction in 2020, ET has made significant strides in its financial position and value creation for investors. The company has successfully acquired three companies: Enable Midstream, Woodford Express, and Lotus Midstream, adding to its already extensive portfolio. With nearly 125,000 miles of pipeline and a robust infrastructure, ET has established a strong competitive advantage in the sector. The capital intensity, permitting requirements, and operational expertise needed to build pipelines make it challenging for new companies to enter the market, further solidifying ET's position.

ET's growth is reflected in its financial metrics. Comparing 2019 to 2022, the company has witnessed substantial increases in revenue, EBITDA, and free cash flow. In 2022, ET generated $89.88 billion in revenue, $12.29 billion in EBITDA, and $6.55 billion in free cash flow. Furthermore, the company has successfully reduced its debt, further strengthening its financial position.

When evaluating ET within its peer group, it becomes evident that the company is undervalued. ET's market cap to DCF ratio and market cap to Adjusted EBITDA ratio are significantly lower than the average of its peers, indicating its attractive valuation. While some critics have raised concerns about the company's debt load, it remains within a respectable range compared to its peers, given its substantial DCF and Adjusted EBITDA generation. Moreover, ET boasts the largest distribution yield among its peers, offering investors an attractive return on investment.

Considering all these factors, it is apparent that ET presents an excellent investment opportunity. With its impressive growth, reduced debt, and restored distribution, the company has transformed itself into a dominant force in the energy infrastructure industry. Despite its undervaluation, ET's potential remains untapped, particularly considering the recent acquisition of Lotus Midstream. Based on expert analysis, ET is believed to be undervalued by at least 50%, suggesting a unit price of $19.70. This presents a compelling case for investors to consider ET as an attractive long-term investment option. As such, the bullish outlook on ET is likely to continue until there is substantial reason for a shift in sentiment.

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