Energy Transfer (NYSE: ET) has undergone significant changes over the past few years. The large-scale midstream company has simplified its structure and improved its balance sheet all while investing a considerable amount of money to expand its operations. Because of all that hard work, the new Energy Transfer is a much more compelling investment option.
That's why investors should get to know this high-yielding pipeline company. For those visual learners, the following four charts should quickly get them up to speed on the company's operations, recent improvements, and investment potential.
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A diversified business model
Energy Transfer is one of the nation's largest, most diversified midstream companies. As the following chart shows, the company operates assets that transport, process, and store oil, natural gas, natural gas liquids (NGLs), and refined products:
That diversification sets it apart from its peers, since most tend to focus on one commodity. Kinder Morgan and Williams Companies, for example, make most of their money on natural gas. ONEOK and Enterprise Products Partners, on the other hand, focus on NGLs. Finally, Plains All American Pipelines and Magellan Midstream Partners mainly operate oil and refined products assets, respectively. That broader approach means the company could have more expansion opportunities in the coming years, since the energy sector needs to invest $800 billion on building new midstream assets through 2035, including more than $400 billion on gas projects, $321 billion on the oil side, and only about $53 billion on new NGL-related infrastructure.
A fast-growing company
Energy Transfer has already been able to leverage its diversification to significantly expand its asset base. Over the past two years, the company has completed large pipeline projects for oil, natural gas, and NGLs as well as other related infrastructure across each energy commodity. These projects have enabled the company to grow its earnings at a fast pace in recent years:
That growth should continue in the future since the company has already lined up several expansion projects that won't enter service until after next year. These include another large oil pipeline, a diesel pipeline, and an NGL export facility that it expects the finish by the end of 2020. Meanwhile, the company has a large-scale LNG export facility in development that could drive growth post-2020.
An improving balance sheet
Energy Transfer has managed to expand at a fast pace while still improving its balance sheet, which is evident from the decline in its leverage ratio:
The company's improving financial profile will enhance its ability to continue financing expansion projects while maintaining its high-yielding dividend. Further supporting that view is that Energy Transfer expects to cover its current payout with cash flow by a very comfortable 1.7 to 1.9 times. The company anticipates that it will generate between $2.5 billion to $3 billion of excess cash per year that it can reinvest into expansion projects that should grow its cash flow in the future. Eventually, that growing cash flow stream should enable Energy Transfer to start increasing its distribution to investors.
A bottom-of-the-barrel valuation
Typically, a company with a solid financial profile that's growing earnings at a fast pace will sell for a premium valuation. However, as the following chart shows, that's not the case with Energy Transfer:
Instead, the company has the lowest valuation in its peer group. That deep discount doesn't make sense, considering the company's financial metrics are nearly on par with those of higher-end peers Enterprise Products Partners, Magellan Midstream Partners, and ONEOK while it's growing earnings at a faster pace than most of its rivals.
These pictures paint a compelling investment thesis
Energy Transfer is one of the most diversified and fastest-growing midstream companies. Even better, it has a much-improved balance sheet and a dirt-cheap valuation. Those factors make it one of the more compelling energy stocks to consider buying these days.
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Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners, Magellan Midstream Partners, and ONEOK. The Motley Fool has a disclosure policy.