Energy Transfer (NYSE:ET) is one of many oil and gas midstream firms that has a heavy debt load. But ET stock also offers a generous dividend that yields nearly 15%. Just how safe is this dividend for the rest of the year? Given that oil prices are improving, Energy Transfer may be a good fit for both value and income investors.
The Macro Situation
Investors who bet on a rebound in the energy sector at the beginning of the year would have lost plenty of money. The novel coronavirus forced countries to issue stay-at-home orders, causing economies around the world to contract.
And Middle East oil producers, through The Organization of Petroleum Exporting Countries (OPEC), increased oil production by so much a few months ago that oil prices fell to around $10 per barrel. But as many nations open their economies, the market is now pricing in stronger demand for oil.
Energy Transfer’s Results Came in Below Expectations
For the first quarter, Energy Transfer reported a GAAP per share loss of 32 cents. Its revenue fell by 11.4% year-over-year to $11.63 billion. Both figures missed analysts’ average estimates.
The company’s Q1 loss came in at $855 million because it took a non-cash goodwill impairment charge of $1.3 billion. But encouragingly, Energy Transfer issued updated EBITDA guidance, excluding some items, of $10.6 billion to $10.8 billion.
That guidance is impressive, considering that we are in the midst of the worst pandemic in modern history, while oil prices were much lower when the company issued the guidance a few weeks ago.
Energy Transfer’s Positive Catalysts
In March, the company announced a 30.5 cent per share quarterly dividend. Since the firm’s dividend coverage ratio is 1.72, there’s little chance of it cutting or suspending its dividend.
Looking ahead, investors will not need to worry about Energy Transfer taking asset impairment charges, assuming energy prices continue to climb. Plus, if its revenue continues to increase, it will be able to keep paying its dividend and lowering its debt.
The company will cut its capital expenditures by at least $400 million in 2020. Its CFO, Thomas Long, said that the firm would look to reduce its capex by an additional $300 million to $400 million this year.
The company may acquire weaker firms with a better balance sheet to improve its leverage ratio. More likely, its debt reductions will reduce the risk posed by Energy Transfer stock.
Valuation
Analysts have an average price target of $10 on Energy Transfer, according to Tipranks. Their price target range is between $6 and $15. Similarly, the stock has a high value score. These data points suggest that Energy Transfer’s stock could appreciate to around $10.00.
| ET | Industry | S&P 500 | |
| Value Score | 86 | 63 | 73 |
| Price / Earnings | 11.2 | 36.7 | 25.3 |
| Price / Sales | 0.4 | 1.2 | 2.1 |
| Price / Free Cash Flow | 13.8 | 20 | 20.3 |
| Price / Book | 1.1 | 1.5 | 3.5 |
Energy Transfer trades at a price-earnings ratio that is less than half of the S&P 500’s average. Investors are unwilling to pay an average multiple for the shares because the energy sector is very unpredictable and uncertain.
Another Name to Consider
Investors who are interested in related companies with high dividend yields and better balance sheets may consider Kinder Morgan (NYSE:KMI). In the last reported quarter, the company increased its dividend by 5% and reduced its capital expenditures.
The Bottom Line on ET Stock
Energy Transfer is an undervalued investment for long-term income investors.
In the next few weeks, Energy Transfer stock could move in either direction. Much of its uptrend in the last few weeks has been due to the rebound of oil prices.
Investors should only buy the stock if OPEC keeps its oil output relatively low. However, if traveling by automobile and airplane continues to become more popular, oil demand should rise further, providing another catalyst for Energy Transfer stock.
As of this writing, the author did not hold a position in any of the aforementioned securities.