What Does Energy Transfer Equity’s Relative Valuation Indicate?
Energy Transfer Equity’s price-to-distributable cash flow
So far in this series, we’ve talked about Energy Transfer Equity’s (ETE) recent market performance, price forecast, and technical indicators. In this article, we’ll look into ETE’s valuation using historical and forward multiples.
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Energy Transfer Equity (ETE) was trading at a price-to-distributable cash flow of 18.2x as of July 18, 2017, which is above the last-ten-quarter average of 17.9x.
Energy Transfer Equity’s forward EV-to-EBITDA multiple
Energy Transfer Equity’s forward EV-to-adjusted EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 11.8x as of July 18, 2017, which is below the historical five-year average of 13.5x. However, it’s still trading above the peer median multiple of 11.3x. At the same time, Energy Transfer Partners (ETP) is trading significantly below its historical average. ETE peers Kinder Morgan (KMI) and Williams Companies (WMB) are currently trading at 11.3x and 11.7x, respectively.
Energy Transfer Equity’s distribution yield
Energy Transfer Equity was trading at a distribution yield of 6.3% as of July 18, 2017, which is above its historical five-year average of 5.3%. ETE’s distribution yield is higher than that of the SPDR S&P 500 ETF (SPY) at 1.9%.
ETE’s high relative valuation might not be justified considering its high leverage, declining cash flows, and coverage due to IDR (incentive distribution rights) subsidies and relatively high commodity price exposure. The partnership’s distribution coverage fell below one to 0.86x in 1Q17. A distribution coverage below one indicates that an MLP is unable to cover its distribution from internally generated cash flows. The trend is expected to continue until the end of the fourth quarter of 2017 due to the growth in IDR subsidies.
In the next part, we’ll look at ETE’s recent analyst recommendations.