20 Sep

Where Energy Transfer Stock Could Be Headed Now

WRITTEN BY Vineet Kulkarni

Energy Transfer (ET) stock has recovered in the last two trading sessions after investors hammered it on its plans to acquire SemGroup (SEMG). The midstream giant agreed to buy SemGroup for $5.0 billion including debt early this week.

Energy Transfer’s SemGroup acquisition

The merger consideration consists of 40% cash and 60% equity and is expected to have no material impact on credit metrics, as per Energy Transfer.

At the end of the second quarter, Energy Transfer had net debt of $46.0 billion. Its net debt-to-EBITDA ratio was close to 4.8x. In the second quarter of 2018, it was close to 6.2x. Thus, Energy Transfer seemed to be working fine on the deleveraging front until now. But the recent acquisition might again increase the company’s total debt.

This potential debt setback could have upset investors, as Energy Transfer is trying to trim down its total debt. The combined company is expected to save $170.0 million in annual run-rate synergies after the deal’s completion.

Where Energy Transfer Stock Could Be Headed Now

Chart indicators

Energy Transfer stock is currently trading at $13.6, almost 2% and 6% below its 50-day and 200-day moving average levels, respectively. The stock’s fair discount to both these levels suggests weakness. Its 50-day moving average of close to $13.9 could act as a resistance for it in the short term. The stock has an RSI (relative strength index) level of 48, indicating that it’s neither overbought nor oversold.

Despite solid earnings growth, Energy Transfer stock has dismayed investors this year. It’s only marginally up YTD. In comparison, midstream giant Kinder Morgan (KMI) is up about 35%, while Enterprise Products Partners (EPD) has rallied 17% so far this year.

Energy Transfer stock is currently trading 25% below the 52-week high of $18.2 it saw in October last year. It has rallied more than 16% from its 52-week low of $11.7 in December.

The Alps American MLP ETF (AMLP) is currently trading in the overbought zone with its RSI at 72. Almost all AMLP constituents got a boost after crude oil surged due to drone attacks on a Saudi Arabian refinery. AMLP is currently trading marginally below its 50-day moving average and 2% below its 200-day moving average.

Valuation

Energy Transfer stock is currently trading at 9.2x its estimated earnings for the next 12 months. It looks to be trading at a large discount to its five-year historical average of 15x. Moreover, analysts are expecting Energy Transfer’s EPS to rise 20% in 2019. Thus, given its healthy earnings growth, the stock looks attractively valued at the moment. Peer Kinder Morgan is valued at around 20x, while Enterprise Products Partners is valued at 13x its forward earnings.

Energy Transfer stock: Analysts’ views and price targets

Analysts have given Energy Transfer a mean target price of $21.1, which implies an estimated upside of 54% for the next 12 months. Of the total 20 analysts covering ET, ten give it “strong buys,” eight give it “buys,” and two give it “holds.” No analysts recommend “sells” as of September 20.

Enterprise Products Partners has a mean price target of $34.9, which implies a potential upside of 21% for the next 12 months. It’s currently trading at $28.8.

Kinder Morgan offers an estimated upside of 7% based on analysts’ mean price target of $22.2. It closed at $20.7 on September 19.

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