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Energy Transfer Equity Fell 4.5% Last Week: Can It Bounce Back?

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Part 3
Energy Transfer Equity Fell 4.5% Last Week: Can It Bounce Back? PART 3 OF 5

Energy Transfer Equity’s Valuation: Is It a Buying Opportunity?

Current versus historical valuation

In this part of the series, 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 16.5x. That’s low compared to its ten-quarter average of 19.5x.

ETE’s peers Williams Companies (WMB), EnLink Midstream (ENLC), and Western Gas Equity Partners (WGP) have seen similar falls in their valuation multiples since the rout in energy prices.

Energy Transfer Equity’s Valuation: Is It a Buying Opportunity?

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ETE is currently trading at a forward distribution yield of 6.4%. That’s 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.

Relative valuation

ETE’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is based on the next 12-month EBITDA estimate, is 15.8x. Its forward EV-to-EBITDA multiple is above the peer median of 12.5x.

What ETE’s current valuation tells us

ETE’s slight undervaluation in relation to its historical valuation might indicate a buying opportunity, given its impressive distribution coverage and subsidiary expansion opportunities. According to its recent 10-K filing, Energy Transfer Partners (ETP) expects to spend ~$3.4 billion–$3.5 billion on organic projects during 2017.

In contrast, ETE’s high valuation compared to its peers might not be justified, given the fall in its distributable cash flow due to IDR (incentive distribution rights) subsidies to Energy Transfer Partners and Sunoco Logistic Partners (SXL), its high leverage, its high commodity price exposure, and its flat distributions.

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