Energy Transfer: The Market Stamps Its Foot And Makes A Scrunchy Face

Summary

ET continues to bob along in the high single digits.

Investors get scrunchy faces at the lack of growth.

We counsel patience and enjoyment of spending their 6.5% yielding distribution.

We think the company is attractive at current prices and present a thesis for growth someday.

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zdravinjo/iStock via Getty Images Introduction

Energy Transfer ( ET ) reported earnings last week, hitting some projections and missing others. About par for the course with this pipeline giant. The market made a “scrunchy face” and shares went down… for no particular reason. Today shares are headed higher, again for no particular reason. Investors looking for growth have been disappointed with the company’s performance for a long time. Too rapid with expansion plans and acquisitions has led to the accumulation of massive debt and contributed to the company’s underperformance. That era is largely past, the company tells us . It also leads us in a direction of pointing out again: A pipeline in the ground is worth 10, or 20 on the drawing board. Infrastructure is a term increasingly used these days, and ET has it. We will discuss the infrastructure catalyst for ET.

My job here is to present a reasonable case why companies will improve their prospects in the coming quarter, or why they may not improve. The data that ET supplies suggests that the basis for their prospects improving is a good one, subject to the vagaries of the market. They’re generating massive cash flow and their distributions are well-funded. There’s also a case for increased distributions in the near future and we will discuss.

So sit back and I will try to earn the 45-90 seconds you spend reading this article. Investors looking for growth-e-v-e-n-t-u-a-l-l-y, and present day income should look carefully ET at its current price point. Pipeline Smack Down

Whatever else you can say about pipelines, the fact remains they’re increasingly unpopular. People and governmental entities grudgingly tolerate ones that are in the ground. New ones though, or modifications to an existing one… and you will get people concerned about the production of oil and gas and determined to throw any roadblock they can in their way, coming out of the woodwork. In short, people get scrunchy faced when the subject of pipelines come up.

In recent times the news has gotten worse with the Pennsylvania AG bringing criminal charges that could result in fines against the company in regard to its Mariner East pipeline. Now this is nothing new and it makes ET look like the Keystone Cops, but is really harassment of the company by the AG for political gain. Pipelines are built by digging trenches and boring holes under waterways. It’s this second instance that causes them trouble.

To help them run pipe, a drilling fluid comprised of water, clay-cat litter if you pelletize it, is used to make a seal on the bore hole, and caustic soda – an industrial intermediate and completely water soluble, to raise the viscosity, and a little barite-barium sulphate – (ever had an x-ray of your intestinal tract? You just drank barite ) to make it a little heavier than the water. That’s it in about 99% of the cases. If they lose returns, some shredded walnut hulls may be added to the mix. You can call this an “industrial waste” if you like, but you can find all of these materials in your cleaning supplies… well maybe not barite and walnut hulls.

You could say the Pennsylvania AG has a real scrunchy face for ET. So what? The company will pay the fines which typically have been modest in past cases, at least in relation to their ability to pay, and life will go on. Infrastructure as a catalyst

Whatever else you think about a property, the thing that matters most is its location. I think there is a case to be made for pipeline infrastructure that’s built out. It can’t be replaced for a lot of reasons, some of which we will discuss here.

One other point I’ve made before is ET’s midstream footprint cannot replicated in the world we live in today, and at some point people are going to figure this out. That point might not be far off. I’ve used this merged footprint of ET and Enable to show the true scope of this pipeline colossus. Going on recollection the merged ET installed system runs to about 105K […]

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