I am bullish on Energy Transfer (NYSE:), as its excessively cheap valuation and attractive distribution make it appear to be a very attractive place to invest right now.

Energy Transfer is a blue-chip midstream company involved in and propane pipeline transportation. It owns the United States’ largest and most varied portfolio of energy assets.

Energy Transfer, which is a master limited partnership, (MLP), has major operations that include natural gas and refined products. Midstream, interstate and intrastate transportation and storage are also part of the company’s main operations. Energy Transfer, as the U.S.’s only midstream company that supplies all the major oil and gas regions in the country has significant geographical diversification and scale benefits. (See Energy Transfer stock charts on TipRanks)

Strengths                    

Energy Transfer’s asset portfolio features irreplaceable assets and geographic diversity. For the second quarter 2020, the five core segments produced balanced earnings. This prevents the company being too dependent on one segment. Energy Transfer LP also holds the Lake Charles LNG Company (SUN), 28.5 million Sunoco LP common units (SUN), and 46.1 millions common units USA Compression Partners (NYSE).

It was awarded the 2021 GPA Midstream Environmental Excellence Award in June for its patent-pending natural gas compression systems, which reduce carbon footprints.

Recent Results

Energy Transfer reported an adjusted EBITDA of $2.62 billion in the second quarter, which is an increase of $18 million, year-over-year. As compared to $1.27 Billion for 2020, the Distributable Cash Flow in the second quarter 2021 was $1.39 billion. This increase was largely attributed to higher earnings from the company’s NGL and refined products, midstream and intrastate segments.

Energy Transfer completed its second quarter expansion of Nederland’s LPG facility, allowing it to export 700,000. NGL barrels per hour more. Combined with the export capacity of its Marcus Hook terminal and Mariner West pipeline, Energy Transfer’s total NGL export capability has now reached over 1.1 million barrels per day, ranking it one of the largest in the world.

Along with its Series H preferred unit offering of $900 million, the company reduced its debt by $1.5 billion. This was in addition to its retained operational cash flow.

Despite the fact that it has been underperforming in comparison to competitors, such as the Dakota Access Pipeline Pipeline (DAPL), recent reports indicate promising growth and potential for Energy Transfer.

Brighter times may lie ahead when you consider its balanced and highly-diversified business portfolio, record growth in NGL exports, as well as its high level of diversification. However, shareholders must remember that DAPL is in the midst of a trial and may be left disappointed if it goes down.

Valuation Metrics

Energy Transfer stock looks very cheap at the moment. The Energy Transfer stock’s EV/EBITDA ratio of 7.54x is among the lowest investment grade midstream companies. Its P/DCF ratio, at 3.10x is the lowest sector-wide among investment grade middlestream businesses.

Wall Street’s Take

From Wall Street analysts, Energy Transfer earns a Strong Buy analyst consensus based on 4 Buy ratings, 0 Hold ratings, and 0 Sell ratings in the past 3 months. Energy Transfer’s average price target is $14.00, which puts its upside potential at 53.85%.

Summary and Conclusions

Energy Transfer is very cheap by virtually every metric. The business’s operational performance and its balance sheet showed a solid recovery during the first half 2021, which paints a bright future for investors and the company.

The business’s past is not rosy. There have been repeated instances where mismanagement has cost investor value. Investors should therefore be very cautious when exposing themselves to this stock.

Disclosure: Samuel Smith held a position in Energy Transfer at the time of publication.

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