What ETE’s and ETP’s Valuation Suggests after 2Q17 Earnings
Energy Transfer Equity’ valuation
Energy Transfer Equity (ETE) was trading at a price-to-distributable cash flow of 18.5x as of August 9, 2017, which is above the last ten quarters’ average of 18.0x.
Energy Transfer Equity was trading at a forward EV-to- adjusted EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.9x as of August 9, 2017, which is below the historical five-year average of 13.4x. Moreover, it’s still trading below the peer average multiple of 13.8x.
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Energy Transfer Equity was trading at a distribution yield of 6.5% as of August 9, 2017, which is above its historical five-year average of 5.3%. ETE’s low relative valuation might reflect its high leverage, lower cash flows due to IDRs (incentive distribution rights) subsidies, and Energy Transfer Partners’ (ETP) high commodity price exposure.
Distributable cash flow growth at ETE is expected to resume after the expiration of IDRs subsidies in the fourth quarter or further equity issuance at ETP, which might drive ETE’s valuation higher. However, the situation might worsen if ETE decides to remove IDRs from ETP’s capital structure to reduce its cost of capital. In answer to an analyst’s question about IDRs’ conversion to common equity during the 2Q17 earnings call, Kelcy Warren, ETE’s CEO, replied, “Yes, we have thought about that. We are looking at all of our options right now of what would be—if there’s an interim step that can be done sooner. So yes, we’ve looked at that.”
Energy Transfer Partners’ valuation
Energy Transfer Partners was trading at a forward EV-to-EBITDA multiple was 4.0x. ETP’s forward EV-to-EBITDA multiple is significantly below the historical average of 10.7x. Moreover, it’s trading below the peer median of 11.3x.
The partnership had spent $1.7 billion on organic projects in 1H17, and it expects to spend $2.2 billion in the second half of the year net of asset-level financing and a stake sale in the Rover Pipeline project. ETP had total liquidity of $3 billion under its two credit facilities. The partnership is still exploring options to further improve its liquidity position, including a joint venture partner on the Mariner East 2 project and Sunoco LP’s (SUN) limited partnership unit repurchase.