2023-04-28 05:35:21 ET
Summary
- The management team at Energy Transfer will soon be announcing financial results for the first quarter of the company's 2023 fiscal year.
- Heading into earnings, the company looks like a solid prospect, with cash flow likely to come in at a level that's similar to what it was last year.
- Add in how cheap shares are and the additional potential upside associated with its acquisition of Lotus Midstream, and the company makes for a great prospect.
Those who follow my work on a regular basis know that I run a very concentrated portfolio. That is why I pay special attention to the companies that I do decide to buy. This is especially true when it comes to the companies that I allocate the largest portion of my assets to. One of these companies is pipeline / midstream enterprise Energy Transfer ( ET ), a rather large player in the energy sector with a market capitalization of nearly $40 billion. As of this writing, the firm is the 4th largest holding in my portfolio, accounting for nearly 14% of assets. Clearly, I am bullish about the business. But it's important to keep in mind that at the end of the day, inflexible thinking is one of the biggest enemies to any investor. And the investment worthiness and their prospect can change as time goes on. Well, next month, when management announces financial results covering the first quarter of the company's 2023 fiscal year, we will have such an opportunity. Frankly, I believe that the overall picture for the firm should come out positive. But there are certain metrics that investors should pay attention to so that they can best evaluate whether the company still makes sense from an investment perspective or if there are better opportunities that should be focused on instead.
Key metrics should be the emphasis
After the market closes on May 2nd, the management team at Energy Transfer will be reporting financial results covering the first quarter of the company's 2023 fiscal year. The first thing that investors will pay attention to would be the revenue that the company reports. At present, analysts forecast this number to come in at around $21.45 billion. If this comes to fruition, it would represent a 4.7% improvement over the $20.49 billion the company reported for the first quarter of its 2022 fiscal year.
Given the size of the company, how volatile revenue can be based on a variety of factors, and how many different revenue streams the company has, it's difficult to know what the key driver of any revenue increase might be. We do know that one of largest increases for the company from 2021 to 2022 came from the Midstream segment. This is the portion of the company that focuses on natural gas gathering, compression, treating, processing, storage, and transportation. Although natural gas prices have fallen recently, the real driver for the company when it comes to this segment would be the volume of product that's gathered. From 2021 to 2022, volume gathered under this segment grew by 40.5%, while the volume of NGLs produced under it jumped 24.2%.
Frankly, it wouldn't be a surprise to see growth continue on this front. For 2023, management is forecasting growth-oriented capital expenditures of between $1.6 billion and $1.8 billion. 50% of this growth capex is being allocated toward the company's Midstream operations. But of course, there are other areas of the company that are likely to expand during this time as well. Very likely would be growth associated with the crude oil transportation and services part of the firm under these operations was even greater then under the Midstream segment from 2021 to 2022. An increase in crude transportation volumes of 11.8%, combined with a 15.5% rise in crude terminals volumes, took place from 2021 to 2022. Continued growth is likely here as well.
On the bottom line, analysts are forecasting profits per share of $0.35. This would be slightly lower than the $0.37 per share that the company reported, translating to $1.16 billion, during the first quarter of the 2022 fiscal year. Frankly, I don't believe that net profits are all that significant when it comes to a business like this. Instead, I think investors would be wise to place their attention on other measures of cash flow. The most important, at least in my opinion, would be operating cash flow. Unfortunately, analysts have not really provided any guidance on this front. But we do know that in the first quarter of last year, the metric came in at around $2.37 billion. If we adjust for changes in working capital, it would have been even higher at $2.69 billion. Other important profitability metrics to pay attention to would be DCF, also known as distributable cash flow, and EBITDA. In the first quarter of 2022, these figures came out at $2.08 billion and $3.34 billion, respectively.
Very likely, these metrics will match or come close to matching what the company reported last year. The reason why I say this is that management forecasted that overall EBITDA for 2023 should come in at between $12.9 billion and $13.3 billion. At the midpoint, this would work out to $13.1 billion. That's almost identical to the $13.09 billion the company reported for the 2022 fiscal year. Assuming that other profitability metrics follow suit, this would imply DCF for the year of $7.45 billion, operating cash flow of $9.05 billion, and adjusted operating cash flow of $10.72 billion.
This picture could change. But this change would likely have less to do with organic factors and much more to do with acquisition-based activities. You see, in late March of this year, management announced its decision to acquire Lotus Midstream in a deal valued at $1.45 billion. That deal included $900 million in cash, as well as 44.5 million shares of Energy Transfer. Unfortunately, we don't really know what kind of impact this will have on the company moving forward. What we do know is that it will add around 3,000 miles of crude gathering and transportation pipelines, largely centered around the Permian Basin and extending to Cushing, Oklahoma. This deal also brings with it about two million barrels of additional storage capacity, as well as a 5% equity interest in the Wink to Webster Pipeline. Investors should definitely be watching for the impact this will have, not only on the company's balance sheet, but also on the guidance that management puts out.
It is worth noting that the company also just announced an increase to its distribution of $0.01 per annum. Although not much, every penny adds up and the company also stated in the release that it plans to increase its distribution by between 3% and 5% per annum moving forward. This is great to see since it implies that management is also bullish about the firm's future prospects.
Truth be told, I don't believe that there is a significant probability of anything bad coming out of the woodwork when management reports financial results for the first quarter. But even if something does occur, shares of the business look quite cheap. At present, the firm is trading at a price to adjusted operating cash flow multiple of 3.7 and at an EV to EBITDA multiple of 7.7. As part of my analysis, I compared the company to five similar firms. On a price to operating cash flow basis, I calculated that only one of the five companies was cheaper than our prospect. Using the EV to EBITDA approach, our target ended up being the cheapest of the group.
Company | Price / Operating Cash Flow | EV / EBITDA |
Energy Transfer | 3.7 | 7.7 |
Kinder Morgan ( KMI ) | 8.0 | 11.6 |
The Williams Companies ( WMB ) | 7.5 | 10.9 |
TC Energy ( TRP ) | 8.5 | 17.9 |
Cheniere Energy ( LNG ) | 3.6 | 11.2 |
Enterprise Products Partners ( EPD ) | 7.3 | 9.9 |
When I write about a company on a regular basis, I do my best not to replicate my content from one article to another. But given how prices have changed since I last wrote about the company in February of this year, I do believe that it would be appropriate to see what kind of upside the company might have if it were to trade at levels that are more similar to its peer group. As you can see in the table below, I used the price to operating cash flow multiple and the EV to EBITDA multiple to compare the company to its rivals. In one scenario, I looked at how much upside or downside Energy Transfer would experience if it were to trade at the multiple of its lowest competitor. And then the other scenario, I stripped out the most expensive player in the group, averaged out the other four, and assumed that the company should trade at that point. We do have one outlier scenario from this that would show downside of 2.7%. But with the other three examples provided, the company would warrant significant upside, perhaps even more than a doubling from where shares are today.
Takeaway
Since I started buying my shares of Energy Transfer in March of last year, I am quite happy with the results. Even excluding the distributions that I have received, the stock is up 16.8% from the weighted average price that I paid for it. If you add in the distributions I have received, my returns come out to 23.9%. I have no doubt that the company will experience some volatility from time to time. But absent something significantly negative coming out of an earnings release, I believe that the long-term outlook for the company should be quite positive. Because of this, and because I expect future earnings releases to show continued progress toward value creation for investors, I cannot help but to rate the business a 'strong buy' for now.
For further details see:
Energy Transfer: A Great Business At A Great Price Heading Into Earnings