Why Energy Transfer Equity LP Surged 20% in July

By Markets Fool.com

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What: Units of Energy Transfer Equity (NYSE: ETE) bounded higher last month, ending up 20.2% thanks to a bevy of positive comments by analysts.

So what: Barclays started the analyst parade in early July by reinstating its overweight rating and $20 price target. Its analysts believed that the company's units were trading at a discount due to leverage concerns as well as litigation overhang resulting from its failed merger with rivalWilliams Companies (NYSE: WMB). Barclays,however, thought Energy Transfer Equity's leverage was manageable because the company would be generating a lot of excess cash thanks to its preferred unit offering earlier this year. Furthermore, while it believes the distribution will remain flat through 2017, analysts expect the payout to grow by 22% per year from 2018 to 2020 as a result of the project-driven cash flow growth at its master limited partnership,Energy Transfer Partners (NYSE: ETP).

Credit analysts at S&P Global, likewise, agreed with the assessment that Energy Transfer Equity's credit is improving. Its analysts affirmed the company's BB credit rating and took it off credit watch negative while moving their outlook to stable. They believe the company will be able to maintain a stable distribution while keeping its stand-alone debt-to-EBITDA ratio below 4.0 times through 2018.

Shortly after that, analysts at Goldman Sachsreinstated their rating on the company at neutral with a $17 price target. While its analysts thought the company's fundamentals were solid, that outlook was already baked into the unit price. Also, they noted that there were still several negatives to the story, including its high leverage and high costs of capital at some of its subsidiaries. That said, Credit Suisse was a bit more bullish, with analysts reinstating their outperform rating while setting a $20 price target.

Now what: With its ill-fated deal to buy Williams Companies in the rearview mirror, analysts and investors are refocusing their attention on Energy Transfer's stand-alone potential. For the most part, they like what they see because the company avoided the potentially overwhelming weight of the added debt required to take over Williams. Instead, the company is positioned to cut its debt in the near term before returning to growth mode in 2018.

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