Energy Transfer Stock: Is Its Recent Fall an Opportunity?

Energy Transfer (ET) stock has fallen for eight consecutive trading sessions and closed at $12.67 on October 2. It is now trading at the lowest levels of the year. Energy midstream giant Energy Transfer has failed to please investors despite solid earnings growth this year.

Energy Transfer Stock: Is Its Recent Fall an Opportunity?

Energy Transfer: Global growth worries

Crude oil prices have been notably weak on slowing global economic growth and have fallen more than 15% since mid-September. A decline in global manufacturing activity and automakers reporting a steep decline in car sales have weighed on oil prices recently.

Even if midstream companies don’t have much direct exposure to energy commodity prices, overall sentiment in the energy industry dents these stocks. Energy Transfer stock has had a correlation of almost 0.3 with WTI crude oil prices so far in 2019.

Technical indicators

Energy Transfer is currently trading at $12.67, approximately 7% and 13% lower than its 50-day and 200-day simple moving average levels, respectively. The large discount to both key levels indicates weakness in the stock.

Its faster moving average around $13.60 could act as short-term resistance for the stock. However, its lowest close from 2018 of $11.80–$12.00 might act as a support in the short to medium term.

Energy Transfer agreed to acquire Semgroup Corporation (SEMG) for $5.0 billion last month. Investors hammered the stock on the announcement, as the company’s debt load is already a concern.

The ALPS Alerian MLP ETF (AMLP), the representative of the top MLPs, has been relatively better off recently. AMLP has fallen about 5% since mid-September. AMLP currently looks weak based on its simple moving average levels. It is trading at $9.00, almost 2% and 7% below its 50-day and 200-day levels, respectively.

Energy Transfer stock might reverse its direction based on its RSI (relative strength index) levels. On October 2, its RSI was close to 20, indicating that the stock was in the oversold zone. AMLP is currently trading in the oversold zone with an RSI of 25.

Short interest in Energy Transfer stock marginally decreased on September 13. The total number of shorted shares was close to 107.0 million on August 30. On September 13, its shorted shares decreased to 106.6 million. This decline in short interest means that fewer investors expect the stock to fall from its current levels.

Attractive distribution yield

Energy Transfer is currently trading at a distribution yield of 9%, higher than the industry average. The recent fall in its stock has made its yield look even more attractive. To learn more about its distribution profile, please read What Differentiates Energy Transfer Stock from Its Peers?

Among the major players in the energy midstream space, Kinder Morgan (KMI) and Enterprise Products Partners (EPD) yield 4.9% and 6.1%, respectively.

Energy Transfer stock appears to be trading at a notably discounted valuation. It is trading almost 9x its forward earnings. ET stock appears to be discounted in historical terms as well as compared to its peers. Kinder Morgan is trading 19x while Enterprise Products Partners is trading 13x their respective estimated earnings.

In the second quarter of 2019, Energy Transfer’s adjusted EBITDA reached $2.8 billion. That represented an increase of 25% compared to the second quarter of 2018. The company has been reporting consistent earnings growth in the last few quarters. Its adjusted EBITDA increased 17% compounded annually since 2015.

Energy Transfer: Analysts’ price targets

Wall Street analysts continue to look positive on Energy Transfer stock. Among the 20 analysts covering ET, two recommended it as a “hold,” 10 recommended it as a “strong buy,” and eight recommended it as a “buy.” Energy Transfer stock has not received a “sell” rating for more than a year.

Based on analysts’ estimates, Energy Transfer stock has a mean price target of $21.10, suggesting a huge potential upside of 67% for the next 12 months. Notably, the stock offers a handsome total return potential with a hefty capital gain and generous distribution yield.

Midstream giant Kinder Morgan (KMI) offers a potential upside of 10.5% based on analysts’ mean price target of $22.30. It is currently trading at $20.20.

Enterprise Products Partners (EPD) has a mean price target of $34.90 against its current market price of $28.10. This indicates a potential upside of 24.1% for the next year.