What Does Energy Transfer Partners’ Valuation Indicate?
ETP’s forward EV-to-EBITDA multiple
The EV (enterprise value)-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple is a popular way of valuing MLPs. The EV-to-EBITDA ratio is capital-structure-neutral, as it considers both the company’s debt and equity. The forward EV-to-EBITDA ratios based on current fiscal year EBITDA estimates for Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), Williams Partners (WPZ), and Magellan Midstream Partners (MMP) are 12.7, 7.5, 11.1, and 13.7, respectively.
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So, Energy Transfer Partners looks undervalued currently relative to its peers, based solely on its forward EV to EBITDA. ETP’s forward EV to EBITDA is also lower compared to its own five-year average multiple.
It should be noted that out of the four MLPs, only Energy Transfer Partners has IDRs (incentive distribution rights) in its structure. The forward EV-to-EBITDA multiple can be misleading when trying to find LP (limited partner) unit valuation, as the full EBITDA used in the ratio calculation may not be available to LPs due to the presence of IDRs.
MMP’s forward EV-to-EBITDA multiple
Magellan Midstream Partners has the highest EV-to-EBITDA ratio among the MLPs under consideration. Interestingly, MMP’s forward multiple is lower compared to its own five-year average multiple. Magellan has historically traded at a premium compared to peers, likely due to its lower risk and stable returns.
Similarly, Enterprise Products Partners also is trading at a higher multiple compared to peers. It too has historically traded at a premium valuation due to its superior risk-return metrics.
Williams Partners is trading at a forward EV-to-EBITDA multiple close its five-year average.
Of the top four MLPs, Energy Transfer Partners is currently trading at the highest yield of ~13.4%. The recent drop in ETP’s prices resulted in a rise in its yield. A complex structure, high leverage, and regulatory hurdles also likely contribute to ETP’s high yield and discounted valuation.
Enterprise Products Partners and Williams Partners are trading at attractive yields of ~6.8% and 6.5%, respectively. Magellan Midstream Partners is trading at a yield of ~5.3%.