The Context of the Article

The stock of Energy Transfer LP (NYSE:ET), a company with a wide range of energy assets, has several factors influencing its performance. This article will focus on two important factors and offer caution regarding the stock’s current appeal to investors.

The Growing Importance of ET’s NGL/Refined Product Division

One significant segment of Energy Transfer’s business is the transportation of Natural Gas Liquids (NGL) and Refined Products. This segment has become the top contributor to the company’s total earnings before interest, taxes, depreciation, and amortization (EBITDA), accounting for 27% of the total in the first half of this year.

In addition to the current strong performance, the export of NGLs from the United States, particularly ethane propane, has been increasing. This trend is expected to continue, as the country anticipates exporting at a high rate through the end of the fiscal year 2024. ET management is also in discussions to secure a significant portion of future ethane volumes for the company.

Energy Transfer is well-insulated from commodity price fluctuations due to its long-term, fee-based contracts. The company benefits from take-or-pay transportation contracts, which guarantee payments regardless of the transported volume.

Financing Policies and Capital Management Improvements

Energy Transfer’s management has shown improved judgment in capital allocation and financing decisions. The company plans to increase its growth capital expenditure (CAPEX) to support the expansion of its asset base. Despite increased CAPEX, Energy Transfer has successfully reduced its reliance on debt financing in recent years.

Moreover, the company’s assets are generating useful free cash flow (FCF), reducing the need for external funding. As a result, Energy Transfer aims to lower its debt level and potentially resume its unit buyback activities. These favorable financing policies demonstrate an improved financial position.

Why Investors Should Exercise Caution

While Energy Transfer’s business has notable strengths, there are reasons for caution when considering an investment in the company. The stock’s technical analysis shows a potential reversal pattern, indicating a possible sideways movement or a decrease in the upward trend.

Additionally, the current distribution yield falls short of the four-year average, and the stock is relatively expensive compared to its historical valuation. The projected EBITDA growth rate is modest, and insider sentiment and institutional ownership do not provide strong support for a bullish position.

Considering these factors, it is important for investors to carefully evaluate the current state of Energy Transfer’s stock before making any investment decisions.