Will Energy Transfer Escape The Bear Trap? (NYSE:ET)

Bear Trap

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Investment Thesis

Energy Transfer LP (NYSE:ET) investors looking for a sustained growth similar to that between 2009 to 2015, would be sorely tested by the recent 20.1% stock plunge in the past two weeks. Though no one can predict the future, it is apparent to most investors that the bear has been out hunting since November 2021. The tech and staple stocks had suffered first, with the S&P 500 Index also falling by -20.96% in the past six months.

We are of the opinion that the bear could finally be looking at the energy sector next. Therefore, we encourage more patience for interested investors, before adding more ET to their portfolios. Given the potential volatility, it would be better to observe and gain a deeper understanding of the situation.

ET Is Likely To Report An Excellent FY2022

ET Revenue and Gross Income

ET Revenue and Gross Income

S&P Capital IQ

ET reported revenues of $70.19B in the last twelve months (LTM), with a relatively decent gross margin of 16.6%. In FQ1’22 alone, the company reported revenues of $20.3B, with consensus estimates of FQ2’22 revenue of $20.38B, representing an excellent increase of 36.4% YoY.

ET Net Income and Net Income Margin

ET Net Income and Net Income Margin

S&P Capital IQ

It is evident that ET reported excellent profitability with a record-breaking $5.46B of net income in FY2021, representing an impressive CAGR of 24.72% in the past two years. In addition, given the red-hot demand for energy, the company also reported robust Free Cash Flows (FCF) of $8.34B in FY2021. We also expect its investments in Mariner East Pipeline, Gulf Run Pipeline, and Cushing South Pipeline, to name a few, to finally deliver results from FY2022 onwards. Thereby, maximizing its gross margins and net income profitability moving forward.

ET Cash/Equivalents, FCF, and FCF Margins

ET Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

ET Operating Expense

ET Operating Expense

S&P Capital IQ

ET has kept its operating expenses relatively stable in the past two years, with a total of $4.87B in the LTM, representing 6.95% of its revenue then. In addition, the company has been steadily reducing its debt obligations over time, also through the recent sale of its 51% interest in Energy Transfer Canada. Given ET’s careful management, we may expect a meaningful reduction in its capital expenditure by -32.6% YoY, to $1.9B for FY2022. Accordingly, we believe the company is likely to generate robust FCF profitability moving forward.

ET Net PPE, Long-Term Debt and Capex

ET Net PPE, Long-Term Debt and Capex

S&P Capital IQ

ET Projected Revenue and Net Income

ET Projected Revenue and Net Income

S&P Capital IQ

It is apparent that consensus estimates the energy demand to remain consistently high for the next three years, since ET’s revenue growth is expected to remain broadly in line, while its net income would grow at a CAGR of 5.49%. Given the insatiable energy demand now and the completion of its pipeline projects within the year, it is no wonder that consensus estimates that the company would report revenues of $80.77B and a net income of $5.14B for FY2022. It would represent impressive YoY revenue growth of 21.1%, though a net income decline of -5.8%, respectively.

Therefore, we believe that the stock’s current price action is probably momentarily decoupled from its current and projected fundamental metrics. It remains to be seen if ET can escape unscathed from the hunting bear.

So, Is ET Stock A Buy, Sell, Or Hold?

ET 5Y EV/Revenue and P/E Valuations

ET 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

ET is currently trading at an EV/NTM Revenue of 1.12x and NTM P/E of 9.81x, lower than its historical EV/Revenue mean of 1.66x though slightly elevated from its historical P/E mean of 9.08x. The stock is also trading at $9.83, nearing its 52-week low of $7.96. It is evident that ET is impacted by the recent plunge affecting the majority of energy stocks in the market, since it is down 20.1% from its recent 52-week high of $12.31 on 7 June 2022.

ET 5Y Stock Price

ET 5Y Stock Price

Seeking Alpha

With the recent plunge, it could be entirely possible that ET is bound for a pullback or marketwide correction, after a two years bull run. Despite the apparent low supply, macro issues, and the ongoing Ukraine war, the potential recession has also spooked many investors, given the cyclical nature of the energy market. Assuming that the stock continues its free fall, it is not hard to imagine ET reaching a new low price of $7 in the next few days, despite the consensus estimates’ strong buy rating and the price target of $15.80. However, we may always hope to see a reversal on its next earnings call. We shall see.

Therefore, we rate ET stock as a Hold for now.

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