Midstream titan Energy Transfer (ET) plans to report its third-quarter earnings on Wednesday after the markets close. The consensus estimates indicate that the company will report an EPS of $0.37 for the quarter ending September 30. The EPS represents an increase of more than 17% compared to the third quarter of 2018.
The company has beat analysts’ EPS expectations in three of the last ten quarters. The company reported solid earnings growth for the last several quarters. However, the stock didn’t pick up this year. Weak crude oil and natural gas prices weighed on the stock. Energy Transfer’s bottom line and management commentary will be important. Any update on the distribution increase front might drive the stock.
Energy Transfer’s earnings
According to analysts’ estimates, Energy Transfer will report total revenues of around $14 billion in the third quarter. In the same quarter last year, the company reported revenues of $14.5 billion. Last year, the company’s revenue growth averaged around 35%. However, the company’s revenue growth will likely fall to 5% this year. The slowing revenue growth might concern investors. Energy Transfer posted solid earnings growth mainly due to its growth projects. An expansion project on the Dakota Access Pipeline will be important during the upcoming earnings.
Apart from earnings, Energy Transfer’s debt at the end of the third quarter will also be key to watch. The company agreed to acquire SemGroup (SEMG) in September. The acquisition will likely increase Energy Transfer’s fee-based cash flows, which could be a big positive. However, the company is trying to deleverage and strengthen the balance sheet.
At the end of the second quarter, Energy Transfer had a net debt of $46 billion. The company’s net debt-to-EBITDA ratio was close to 5x—marginally higher than its target. The net debt-to-EBITDA ratio indicates how many years a company will take to repay its debt keeping earnings and debt unchanged.
Energy Transfer’s asset sale update will also be important. In September, Italy’s Snam was working on a bid to buy Energy Transfer’s Rover Pipeline. The proceedings from the asset sale are generally used to repay debt.
Kinder Morgan (KMI) had a net debt of $36.3 billion, while Enterprise Products Partners (EPD) had a net debt of around $27 billion, according to their recent quarterly filings. Kinder Morgan reported its third-quarter results last month. To learn more, read Kinder Morgan: Q3 Earnings Had Mixed Results.
Based on the estimates, Energy Transfer will report an EBITDA of $2.7 billion in the third quarter. The EBITDA marks an increase of 11% YoY. The company increased its fiscal adjusted EBITDA guidance range to $10.8 billion–$11 billion during its last quarterly release. In the second quarter, Energy Transfer posted an adjusted EBITDA of $2.8 billion.
Energy Transfer’s distribution
Energy Transfer has been paying a flat distribution for months. However, the company’s distributable cash flow increased in the last few quarters. The distribution coverage ratio was 2.0x in the second quarter. Meanwhile, the future distribution is steadier when the distribution coverage ratio is higher. The company is trading at a distribution yield of 9%, which is notably higher than many of its peers. Enterprise Products Partners offers a yield of 6.1%, while Kinder Morgan yields 4.9%.
Currently, Energy Transfer stock appears to be trading at a notable discount compared to its historical average. The company is trading at 8.5x its estimated earnings, while its historical average is around 15x. So far, Energy Transfer stock has lost more than 4% this year. The stock also looks significantly inexpensive compared to its peers. Kinder Morgan stock is trading close to 20x, while Enterprise Products Partners is trading at 12x its forward earnings. They have risen about 34% and 8%, respectively, this year.
Energy Transfer stock offers a handsome upside potential of 65% based on analysts’ mean target price of $20.84. Currently, the stock is trading at $12.64.
Analysts continue to look positive on the stock. Among the 20 analysts covering Energy Transfer, ten recommend a “strong buy,” eight recommend a “buy,” and two recommend a “hold.” None of the analysts recommend a “sell” as of today.
Enterprise Products Partners has a target price of $34.88 compared to its current market price of $26.65. The target price indicates a potential upside of 31% for the next year. Citigroup cut Enterprise Products Partners’ target price from $33 to $31 last week.
Kinder Morgan offers an estimated upside of just 8% based on analysts’ target of $22.15. Currently, the stock is trading at $20.56.