Is Energy Transfer Equity’s Current Valuation Justified?
Current versus historical valuations
In this post, we’ll perform a valuation analysis for Energy Transfer Equity (ETE) based on its historical and forward multiples. ETE currently trades at a price-to-distributable cash flow of 17.0x. This number is low compared to the ten-quarter average of 19.5x.
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ETE is currently trading at a forward distribution yield of 6.1%, which is higher than its historical average distribution yield. The forward distribution yield of a company is calculated by dividing its estimated one-year future distribution per unit by its market price per unit.
ETE’s forward EV-EBITDA EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is based on next-12-month EBITDA estimate, is 12.4x. ETE’s forward EV-to-EBITDA multiple is above the peer median of 12.2x. Moreover, ETE’s forward distribution yield is below the peer median of 6.25%. ETE’s peers Plains GP Holdings (PAGP) and NuStar GP Holdings (NSH) are currently trading at 7.1% and 7.6%, respectively.
What Does ETE’s current valuation tell?
ETE’s slight undervaluation relative to its own historical valuation might indicate a buying opportunity, given its impressive distribution coverage and subsidiaries’ expansion opportunities. According to the recent 10-K filing, Energy Transfer Partners (ETP) alone expects to spend between $3.355 billion to $3.515 billion on organic projects during 2017.
In contrast, ETE’s high valuation compared to its peers might not be justified, given its decline in distributable cash flow due to IDR subsidies to Energy Transfer Partners and Sunoco Logistic Partners (SXL), high leverage, relatively high commodity price exposure, and flat distributions.