Energy Transfer (ET) stock failed to pick up recently and traded close to its yearly lows. It closed at $12.60 on October 23. Midstream titan Energy Transfer has reported solid earnings growth in the last few quarters. However, it could not boost its stock this year.
ET stock has lost almost 5% so far in 2019, notably underperforming its peer MLPs. Weak crude oil and natural gas prices dented the sentiment in the energy sector. This could have weighed on Energy Transfer stock despite its minimal direct exposure.
Energy Transfer: Distribution increase
Energy Transfer’s flat distributions from the last several quarters could be making investors anxious. However, its distributable cash flow increased by a notable 23% to $1.6 billion in Q2 2019. Its distribution coverage ratio was 2.0x in the second quarter.
Usually, the higher the distribution coverage ratio, the more stable the future distribution. So, the foundation for Energy Transfer’s distribution increase looks set for now. A long-awaited distribution increase might increase investors’ optimism.
Energy Transfer is trading at a distribution yield of 9%. That represents a significant yield premium compared to the S&P 500 and the benchmark Treasury yields.
In comparison, the ALPS Alerian MLP ETF (AMLP) offers a yield close to 9%. Peer Kinder Morgan (KMI) yields 5%. You can read more about Kinder Morgan in What Makes Kinder Morgan Stock Attractive? Enterprise Products Partners (EPD) is currently trading at a yield of 6.1%.
Energy Transfer: Q3 earnings
Energy Transfer plans to release its third-quarter earnings on November 6. According to analysts’ estimates, it could report total revenues of $13.92 billion, which represents a fall of 4% YoY.
Its EBITDA could grow approximately 12% YoY to $2.74 billion. Energy Transfer’s EBITDA growth averaged around 50% in the last six quarters. Higher volumes and its capital projects coming online contributed heavily to the steep earnings climb. Another strong quarter could help its stock in the short term.
Apart from its earnings, Energy Transfer’s debt could be another indicator for investors to watch in this quarterly release. At the end of the second quarter, ET had net debt of $46.0 billion. We’ll be interested to see how its management’s efforts on the deleveraging front fared during the quarter. Last month, Energy Transfer agreed to acquire SemGroup (SEMG) in a $5 billion deal.
Energy Transfer stock continues to trade below its 50-day simple moving average level. The level close to $13.20 could act as short-term resistance for the stock. The stock broke below its 50-day level in August and has been trading weakly since then. If it breaks above this level, the bullish trend might set in.
The stock has rallied almost 8% from its 52-week low of $11.68 in December 2018. It has dropped more than 26% from its 52-week high of $17.04 in November.
The ALPS Alerian MLP ETF is also trading well below its both 50-day and 200-day moving average levels and looks weak. It is currently trading close to its early 2019 levels.
Energy Transfer offers fair earnings growth as well as a solid distribution yield. Yet, it seems to be trading at a large discount. It is trading 9x its forward earnings, which is much lower than its five-year historical average.
Peer Kinder Morgan is currently trading 20x while Enterprise Products Partners (EPD) is trading 12x its forward earnings. Kinder Morgan stock has risen more than 32%, while EPD has soared 11% so far this year.
Analysts’ price targets
Based on analysts’ estimates, Energy Transfer stock offers an estimated upside of more than 65% for the next 12 months. They have given it a mean price target of $20.84 against its current market price of $12.60.
Of the 20 analysts covering ET, 10 recommended a “strong buy,” eight recommended a “buy,” and two recommended a “hold.” The stock has not received a “sell” recommendation for more than a year.
Enterprise Products Partners stock has a mean target price of $34.79 against its current market price of $27.45. This implies an estimated upside of almost 27% for the next year. Scotiabank raised its price target from $35 to $36 last week.
Analysts have given Kinder Morgan stock a mean price target of $22.20, which implies a potential gain of 9%. It is currently trading at $20.40. SunTrust Robinson Humphrey cut its price target from $23 to $22 last week.