Despite solid earnings growth in the last several quarters, Energy Transfer’s (ET) performance has failed to pick up. Midstream companies are indirectly exposed to commodity prices through production levels.

If crude oil and natural gas prices stay low, upstream producers generally trim production. Reduced production results in lower throughput volumes, ultimately creating less business for midstream companies. Thus, crude oil prices have continued to drive Energy Transfer stock.

What’s Hampering Energy Transfer’s Recent Performance?

After a fairly strong start in January, Energy Transfer stock has mostly traded in a narrow range this year. Over the past 12 months, the correlation coefficient between crude oil and ET was 0.52, suggesting a moderately positive linear relationship. In this period, ET and the Energy Select Sector SPDR ETF (XLE) fell 13%, largely following crude oil. Kinder Morgan (KMI) and Enterprise Products Partners (EPD) rose approximately 17% and 7%, respectively, in the past 12 months. The Alerian MLP ETF (AMLP) lost almost 2% in the period. ET makes up more than 10% in AMLP.

Superior earnings growth

Since 2015, Energy Transfer’s adjusted EBITDA rose at a handsome compound annual growth rate of 17%, higher than many of its peers. This superior growth came largely from its growth and expansion projects, which transported higher volumes. Energy Transfer has given a 2019 adjusted EBITDA guidance range of $10.6 billion–$10.8 billion, which suggests a potential increase of ~20% YoY. At the same time, analysts expect sluggish growth from peers Kinder Morgan and Enterprise Products Partners this year.

What’s Hampering Energy Transfer’s Recent Performance?

Energy Transfer reported a distributable cash flow of $1.66 billion in the first quarter—a rise of 39% compared to the first quarter of 2018. The company’s distribution coverage ratio was 2.07x in the first quarter. Interestingly, its management expects annual long-term distribution coverage of ~1.7x–1.9x. A coverage ratio of above 1 implies that the company is generating enough cash to pay to its shareholders. Peer Enterprise Products Partners had a distribution coverage ratio of 1.1x in the first quarter. However, Energy Transfer hasn’t increased its distribution for more than a year now, which might bother investors.

Energy Transfer simplified its structure last year and removed incentive distribution rights. The new unit after acquiring Energy Transfer Partners provided $2.5 billion–$3.0 billion in cash to pay for growth projects.

Energy Transfer’s growth projects

Energy Transfer’s Crude Oil Transportation and Services segment has been its main growth driver in the last few quarters. The segment has benefited from higher transported volumes mainly through Texas pipelines and the Bakken pipeline. Along with the crude oil segment, ET is betting big on the NGLs (natural gas liquids) and Refined Products segments as well. Of Energy Transfer’s $5 billion planned investment in 2019, 60% is allocated to NGLs, including projects such as the Lone Star Express pipeline and the Mariner East System. According to Bloomberg, ET is mulling the sale of its 33% stake in the Rover pipeline. It came online last year and carries Appalachian natural gas to customers in Ohio, Michigan, and Ontario. The sale is expected to fetch around $2.5 billion.

Expansion in China

Energy Transfer is looking to expand in China despite the ongoing trade tensions between China and the US. The midstream titan set up an office in China in April to better meet its ethane and LNG (liquified natural gas) demand. Chinese demand for LNG will likely play a big role in the US natural gas industry. With several growth projects coming online in the next few years, Energy Transfer seems well placed for continued healthy earnings growth going forward.

To learn more about Energy Transfer’s price targets and analysts’ views, read Analyzing MLPs With Solid Total Return Potential.

Latest articles

Apple (AAPL) investors have had a roller coaster week. Apple stock has lost just under 2% in a week, ending on August 23, 2019.

Competition taking a toll on Netflix as its share of US subscription video streaming market keep falling as rivals gain ground.

Crude oil production continues to rise, and oil prices remain at $50. Despite that, US energy stocks aren’t getting investors’ interest.

Apple stock fell 4.6% as the US-China trade war intensified today. China warned of tariffs on more US goods, followed by Trump's tweeted response.

In response to new tariffs from China and President Trump's tweets, the market tanked to session lows on Friday. The DJIA nosedived more than 600 points.

Coverage on Cresco Labs has increased from seven analysts in July to nine in August. Six analysts favor a “strong buy,” and three recommend a “buy.”