Top midstream stock Energy Transfer (ET) fell in the last five straight trading sessions and collectively lost almost 8%. Besides Energy Transfer, almost all the midstream stocks were trading weakly for the last few quarters. This is largely due to weakness in crude oil and gas prices. The ALPS Alerian MLP ETF (AMLP) fell almost 13% so far this year.
Energy Transfer is working on a project to modify its LNG (liquified natural gas) terminal in Lake Charles with Royal Dutch Shell (RDS.A). Commercial bids for the project from contractors are expected to be received in the second quarter of next year. The project is estimated to add a total liquefaction capacity of 16.45 million tonnes per annum to export the LNG globally.
ET: Will we see the January effect?
Energy Transfer stock might see some reversal next month based on the January effect. It is a type of calendar anomaly where stocks see a decline in the last month of the year and again pick up in the next month. The reason behind the January effect could be tax-loss harvesting. People generally book losses in stocks to offset those against gains to minimize the tax outgo.
Energy Transfer stock has been notably weak this year and is currently trading close to its three-year low. ET stock witnessed a severe weakness amid a broad market sell-off last December as well. However, it recovered more than 12% in early January.
Energy Transfer: Valuation
Despite the weakness, Energy Transfer stock looks fundamentally strong. It is attractive from a valuation standpoint mainly after an incessant fall recently. It is trading at a forward EV-to-EBITDA (enterprise value-to-earnings before interest, tax, depreciation, and amortization) valuation of 7.8x. This is based on its EBITDA for the next 12 months. Its five-year EV-to-EBITDA valuation comes around 13x. Also, the industry average valuation ratio comes around 9x.
Thus, Energy Transfer stock seems to be trading at a large discount against its historical average as well as against peers. Peer Enterprise Products Partners (EPD) is trading at a forward EV-to-EBITDA valuation of 10x while Kinder Morgan’s (KMI) valuation comes around 10.6x.
Energy Transfer stock looks attractive given its forward PE (price-to-earnings) as well. It is currently trading 7.5x its 2020 EPS. Its five-year average PE comes around 15x. Peers Enterprise Products Partners and Kinder Morgan stocks are trading approximately 11.6x and 18.5x their respective forward earnings. Energy Transfer stock forms almost 10% in the Alerian MLP ETF. EPD also forms almost 10% in AMLP.
Enterprise Products Partners stock is up 4% so far this year while Kinder Morgan stock is up more than 24% YTD. To learn more about Kinder Morgan, read Kinder Morgan: Can the Stock End 2019 on a High Note?
ET stock: Technical indicators
According to the data released last week, Energy Transfer’s short interest increased by 2% as of November 15. The total shorted shares of ET were close to 117.7 million on October 31 while they increased to 120 million on November 15. An increase in short interest might indicate that a greater number of investors expect the stock to fall from the current levels. Short interest indicates investor nervousness.
Energy Transfer stock is currently trading at $11.4. This is almost 9% and 19% lower to its 50-day and 200-day simple moving average levels, respectively. The large discount to both these levels indicates a concerning weakness in the stock.
Its 50-day level close to $12.3 could act as a resistance for the stock in the short term. The recent weakness in the stock has pushed it towards an oversold zone. Its 14-day RSI (Relative strength index) was around 35 as of December 3.
Energy Transfer: Analyst price targets
Energy Transfer stock offers a potential upside of more than 76% based on analysts’ mean target price of $20.1. Wall Street analysts continue to look positive on ET stock. Among the total 20 analysts tracking ET, ten recommended a “strong buy,” eight recommended a “buy,” and two recommended a “hold.” None of them rated the stock a “sell” on December 4.
Kinder Morgan stock has a mean target price of $22.06 against its current market price of $19.14. This indicates a potential upside of more than 15% for the next year.
Enterprise Products Partners has a mean target price of $34.8. So, this indicates a potential upside of 35.5% for the next 12 months. It is currently trading at $25.68.