Assessing Performance: ET vs. S&P 500
In the previous update on Energy Transfer (NYSE:ET), a ‘Neutral/Hold’ rating was attached to the security. In the time since, ET has presented a total shareholder return of +24.98%, surpassing the S&P 500’s +19.15%, resulting in a missed opportunity for +5.83% alpha:
Thesis Retraction
A more bullish outlook on Energy Transfer grows, yet awaiting a better discount for purchase holds weight. The decision between ‘buy’ and ‘wait’ teeters on the edge. For now, retaining a ‘Neutral/Hold’ stance is prudent, considering:
- Crestwood serves as a potent acquisition to fortify ET’s portfolio.
- ET’s robust position to exploit NGL export trends.
- A preference for a valuation discount prior to purchase.
Crestwood: An Upward Acquisition
ET’s rationale for procuring Crestwood Equity Partners’ (NYSE:CEQP) business stands clear. Clarity in capital market transaction rationale is pivotal for M&A or spinoff decisions. Conversely, murky rationale has often undermined positivity in stocks. For instance, TC Energy’s (TRP) spinoff of their liquids pipeline business typifies unclear rationale.
The amalgamated portfolio will bolster ET’s current presence in the Williston and Delaware Basins and facilitate expansion into the Powder River Basin. The company anticipates $40 million of annual cost-saving synergies due to close business overlap. Additionally, the deal augments FCF, crucial for yield-focused investors.
This acquisition, totaling $7.3 billion, is not exorbitant relative to similar M&A transaction multiples. The ET – CEQP deal transpired at a TTM EV/EBITDA of 8.1x, corresponding to a 34% discount to the median transaction multiple of 12.3x. Thus, the risk of overpayment lessens considerably.
ET: Primed for NGL Export Trends
The US Energy Information Administration predicts amplified US exports of hydrocarbon gas liquids in 2024:
Natural gas liquids (NGL) is a subset of hydrocarbon gas liquids.
This bodes well for ET, owning a 20% global market share in NGL exports and 40% in US NGL exports. ET’s co-CEO Thomas Long highlights robust growth in this domain during the Q3 FY23 earnings call:
Total NGL export volumes surpassed a 20% uptick over the third quarter of 2022, marking a new partnership record. This surge was largely spurred by heightened international NGL demand.
Substantial growth in this segment over several quarters and years is evident:
This sector constitutes 30.4% of overall EBITDA for ET.
NGL transportation volume growth has accelerated notably in 2023. Given the encouraging outlook, this trend is expected to persevere.
Seeking Valuation Discount for Purchase
Given the modest variability in cash allocated to unitholders, employing a cash flow multiple for valuation assessment seems fitting. Currently, ET trades at a 1-yr fwd P/Cash Flow per Unit (P/CFPU) of 3.7x, just above the 5-yr median of 3.6x.
While purchases are justifiable within this range, a bit of a discount is preferred, particularly after considering the technicals:
Analyzing Technicals
If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do.
Before delving into the technical analysis,
