Energy Transfer Stock Fell to Three-Year Low: What’s Next?

The strong sell-off continues in Energy Transfer (ET) stock. The stock lost another 4% and closed at its three-year low of $11.16 on Wednesday. Energy Transfer stock fell after the Associated Press reported that the FBI started a corruption investigation of its Mariner East project. The agency is investigating how Pennsylvania Governor Tom Wolf issued a permit to Energy Transfer’s natural gas project.

FBI investigation dented Energy Transfer stock

The investigation focuses on whether the governor forced environmental protection staff to issue a permit and whether his administration received anything in return. However, Wolf clarified that he isn’t aware of any misconduct in the pipeline’s permit process. Mariner East is a 350-mile-long natural gas pipeline project owned by Energy Transfer.

The recent fall might have made Energy Transfer investors even more anxious. The stock has been on a losing spree for a long time. Despite strong quarterly earnings last week, the stock continued to trade weak. Recently, there was a steep increase in Energy Transfer’s volume. On Wednesday, more than 52 million Energy Transfer shares exchanged hands compared to the three-month average daily volume of 13 million. So far this year, the stock has fallen by almost 16%. The ALPS Alerian MLP ETF (AMLP) has lost around 7% YTD.

What’s next for the stock?

Currently, Energy Transfer stock is trading in the oversold zone with its RSI (relative strength index) at 17. The RSI indicates that the stock could see a reversal in the direction. Considering the moving average levels, Energy Transfer stock looks notably weak. The stock is trading 14% and 21% below its 50-day and 200-day simple moving average levels, respectively.

The weakness in Energy Transfer stock is underlined by the significant discount to both its key levels. The stock fell below both of these key levels in August. Since then, the stock has been trading weak. Energy Transfer stock tried to breach its 50-day resistance a few times but failed to do so. On the downside, the stock fell close to $7 levels in early 2016. The 50-day level around $12.85 might act as a resistance for the stock in the short term.

Q3 earnings

Investors were largely disappointed with Energy Transfer’s third-quarter earnings. The company’s adjusted EBITDA grew to $2.61 billion in the third quarter, which represented 7% growth YoY (year-over-year). However, after more than 50% average EBITDA growth in the last four quarters, subdued growth in the third quarter might have spooked investors. The company’s distributable cash flow increased 10% YoY to $1.52 billion.

Energy Transfer’s large debt concerned investors. At the end of the third quarter, the company’s net debt was $46.6 billion. The debt has been rising for the last several quarters. Energy Transfer agreed to acquire SemGroup (SEMG) for $5 billion in September. At the same time, management wants to deleverage and strengthen the balance sheet. At the end of the third quarter, Energy Transfer’s net debt-to-EBITDA ratio was 4.6x. Despite adding to the debt, the company’s leverage ratio has come down significantly compared to its five-year average of 7x.

Energy Transfer has been trading weak for a long time. Weak crude oil and gas prices weighed on the company this year. Ironically, the EBITDA has grown by more than 40% compounded annually in the last three years. However, the stock is trading at its three-year low. Energy Transfer looks appealing from the valuation standpoint as well. We’ll have to see how the new corruption investigation impacts the stock.