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The Complex Tale of Energy Transfer: A Cautionary Analysis for Investors

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The Complex Tale of Energy Transfer: A Cautionary Analysis for Investors

If you find yourself on the lookout for high-yield stocks, chances are you’ve stumbled upon Energy Transfer (NYSE: ET) with its attractive 8.1% distribution yield. This prominent North American midstream energy company plays a pivotal role in transporting substantial amounts of oil and natural gas globally. However, before leaping into the world of Energy Transfer stocks, there are three pertinent pieces of information you must digest.

Unraveling the Complexity of Energy Transfer’s Business

Energy Transfer’s expansive operations across the United States are segmented into five distinct categories: natural gas liquids (NGL) and refined products (28% of adjusted EBITDA), natural gas transportation and storage (24%), crude oil (20%), midstream (17%), and a miscellaneous “other” domain (11%). While this diversification signals resilience, it also unveils a web of intricacies.

A hand drawing two lines, one twisted, complex, and confusing and the other straight and easy to understand.

Image source: Getty Images.

Particularly intriguing is the “other” segment encompassing Energy Transfer’s interests in two smaller master limited partnerships (MLPs): Sunoco LP (NYSE: SUN) and USA Compression Partners (NYSE: USAC).

The Distribution Dilemma of Energy Transfer

At the current share price, Energy Transfer boasts an alluring 8.1% distribution yield. This figure might captivate many investors eyeing the MLP. However, a glance at the distribution history chart, especially the downturn during the pandemic, raises concerns about the stability of income streams.

ET Dividend Per Share (Quarterly) Chart

ET Dividend Per Share (Quarterly) data by YCharts.

The decision to cut distributions amid the market turmoil might have been warranted, but for income-dependent investors, it could be a harsh reality. Contrasting this with Enterprise Products Partners (NYSE: EPD), another major midstream MLP that continued increasing distributions during the same period, prompts introspection for income-focused investors.

The Ghosts of Unitholder Unfriendly Decisions

Although dated in Wall Street’s timeline, the episode where Energy Transfer backed out of the 2015 deal to acquire Williams Companies (NYSE: WMB) left a lasting mark. In dodging the agreement due to industry challenges, the subsequent issuance of convertible securities, particularly to the CEO, raises concerns about management’s alignment with unitholders’ interests.

While exiting the deal might have been prudent for Energy Transfer, the optics of shielding the CEO from distribution cuts through such transactions cast a shadow of doubt on the trustworthiness of management.

Navigating the Energy Transfer Terrain with Prudence

Every investment harbors risks, seasoned with a company’s historical choices. This isn’t to dissuade you from investing in Energy Transfer but rather to encourage a cautious approach. Brace yourself for a labyrinthine journey with a company notorious for its intricate web, distribution uncertainties, and history of unitholder-unfriendly decisions. Navigate wisely through the Energy Transfer landscape.

Should you invest $1,000 in Energy Transfer right now?

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Reuben Gregg Brewer holds no positions in the mentioned stocks. The Motley Fool endorses Enterprise Products Partners. The Motley Fool abides by a disclosure policy.

The perspectives conveyed herein are of the author’s and not essentially reflective of Nasdaq, Inc.