Energy Transfer (NYSE:ET) is frequently written about on Seeking Alpha. Over the past 90 days, 15 contributors have written about ET, 4 were very bullish, 6 were bullish, and 5 were neutral. Wall Street also has its eye on ET as 19 analysts have applied ratings to ET of which 9 were very bullish, 4 were bullish, and 6 were neutral. Not a single Seeking Alpha contributor or analyst on Wall Street has applied a rating lower than neutral to ET. Over the past year, ET’s performance has been the exact opposite of what many had hoped for, leaving a sour taste with some and providing an opportunity for others.
Maybe everyone is incorrect, and we’re just chasing false hopes with ET. The energy sector has been decimated throughout 2020 as we saw negative oil prices, global supply and demand problems, and the effects of COVID-19 on not just businesses but our way of life. Since March, I have increased my position in ET by 72.88%. I increased my position to decrease my average price per unit, generate additional distributions, which I reinvest back into ET, and because I see tremendous upside from ET’s current levels. ET has a gigantic moat around its operations as there are several political hurdles to enter the space in addition to enormous capital requirements. There are many threats to ET, but at the end of the day, I still believe there will be a place for natural gas and oil alongside renewables for decades to come. If ET never retests levels from 5 years ago, I won’t be upset. I will be perfectly happy with ET trading between $10 and $14 if its distributions keep flowing into my account. Currently, ET has a distribution which exceeds 18%, and if its unit price reaches $10 which is an increase of 51.52%, it would still yield 12% from its distribution. In my opinion, units of ET can get back to the mid-teens but on the low side, a $10 price target should not be unattainable.
(Source: Seeking Alpha)
(Source: Energy Transfer Q2 Slide Deck)
Energy Transfer still performed in what could be the harshest quarter businesses have had to face
Q2 of 2020 could be the worst business landscape companies have had to navigate through not just in recent history but for decades to come. As many businesses shut down, less energy was needed, and companies throughout the oil patch faced challenges nobody would have believed in January or February of 2020. ET came in with GAAP EPS of $0.13, which was a miss of $0.16 and generated $7.34 billion, which was a miss of $4.51 billion and a decrease of -47.2% year over year. For the country and the world shutting down in many areas and navigating through what feels like a science fiction screenplay, I thought the numbers were promising. Q2 of 2020 can arguably be the worst business landscape we will face, and ET still generated enough revenue to create $1.27 billion in distributable cash flow and have a distribution coverage ratio of 1.54x. In Q1 of 2020, ET generated $1.42 billion in distributable cash flow and had a 1.72x distribution coverage ratio. To put this in perspective, Tom Miller who is ET’s CFO, started the Q4 of 2019 conference call out by saying “we delivered strong results again in 2019”, and in Q4 of 2019, ET’s distributable cash flow was $1.55 billion, and its distribution coverage ratio was 1.88x.
Q2 2020 wasn’t ET’s finest moment as many key categories suffered significant decreases. ET’s revenue declined by 47.12% quarter over quarter and for the first six months of the year, it has decreased by 29.75% from the prior year. ET’s distributable cash flow decreased by 20.66% in Q2 compared to Q2 of 2019, and for the first 6 months of the year, it decreased by 15.89%. ET’s coverage ratio decreased by 23% quarter over quarter and by 18.5% for the first 6 months year over year. ET has 7 main business segments, of which the total segment adjusted EBITDA in 4 of these categories decreased. The total segment EBITDA decreased in the following business segments by:
- Intrastate transportation and storage 35.52%
- Interstate transportation and storage 12.39%
- Midstream 10.92%
- Crude oil transportation and services 30.98%
If you look throughout the report, there was some good news buried in the numbers. Since ET is a fully integrated midstream operator with diverse business segments which includes over 90,000 miles of pipelines across 38 states, they were able to capitalize on what was working to offset what wasn’t working. ET’s largest business segment by adjusted EBITDA actually increased by 4.66% as NGL and refined products transportation and services brought in $674 million of adjusted EBITDA. ET’s investment in Sunoco LP (SUN) generated $182 million in adjusted EBITDA, which was an increase of 19.74% quarter over quarter. ET faced a harsh business environment, but its diverse business segments allowed them to generated $672 million in net income for Q2. ET’s equity in the company is surprisingly high compared to its market cap as their total assets equal $95.907 billion and their total liabilities equal $63.015 billion. ET’s market cap is sitting around $17.66 billion, and the equity in ET is $32.89 billion. At this rate, the equity in ET is 86.25% more valuable than the actual market cap of the company. Hypothetically, if ET’s assets are inflated by 10% the equity in ET would still be worth 31.94% more than the current market cap.
(Source: Energy Transfer Q2 Slide Deck)
Energy Transfer’s projects will continue to support the global demand for energy with exporting becoming a major source of income
ET has grown its infrastructure organically and by acquisitions. ET has many positives falling into place which will offset some of the impacts felt from lower outputs in basins throughout the country. The addition of SemGroup’s assets, projects which came online in 2019 and bringing online Mariner East, Frac VII and Panther II should positively benefit ET. After reading through the Q2 press release and conference call, it looks like ET is finishing its growth projects. ET revised its 2020 growth capital expenditures to roughly $3.4 billion with approximately 80% being allocated toward projects, which will come online in 2020 or early 2021. These projects include Mariner East, Lone Star Express, Orbit and NGL export projects at Nederland. In 2021, ET is expecting its growth capital budget to come in around $1.3 billion, and for 2022 and 2023, it will be between $500 and $700 million annually. ET is expecting that all of this work will allow their business segments to generate enough income to be cash flow positive after growth capital projects and equity distributions in 2021.
I am expecting ET’s current projects to pay off in a big way over the next decade. ET has been working on optimizing the capacity on the Bakken pipeline. Within the initial phase above, the current 570,000 bpd capacity should accommodate the volume commitments made by shippers with ET during recent open seasons. ET is expecting the additional capacity to come online in Q3 of 2021. The Mariner East system saw its largest average quarterly volumes as they increased more than 50% from the first half of 2019. The utilization rates of the Mariner pipelines and ET’s Marcus Hook facility have increased as record amounts of propane and butane were transported. The next phase of Mariner East should be in service by the end of 2020 with the final phase completed in Q2 of 2021. ET is also adding 50,000 barrels per day expansion at the Marcus Hook terminal to provide additional chilling and storage capacity which will be in service Q1 of 2021. ET is also in its final stages of construction of the Lone Star Express expansion which runs 352 miles and will add 400,000 bpd of capacity from the Permian Basin. This expansion should be online in Q4 of 2020.
BP plc (BP), in my opinion, puts out some of the finest research in the energy sector. In their 2020 Statistical Review of World Energy, BP shows a continuous increase in world energy consumption. If you read through the report, it shows the Asia-Pacific region is increasing their utilization of oil at a rapid pace, while China and Europe are increasing their imports of LNG. In 2019, there were only three countries which exceeded producing more than 10 million barrels per day of oil. Canada was the 4th largest producer with 5.65 million bpd. The United States came in 1st producing 17.05 million bpd, in 2nd was Saudi Arabia with 11.83 million bpd, and Russia in 3rd, producing 11.54 million bpd of oil. The United States also took the number one slot in production of natural gas. The US produced 920.0 billion cubic meters, while Russia produced 679 billion cubic meters, and Iran produced 244.2 billion cubic meters. With the United States being the largest producer of oil and gas, Energy Transfer stands to benefit in a world with increasing energy demands.
Put aside the craziness since March, the global population is still growing. In August of 2020, the global population broke 7.8 billion and is projected to reach 10 billion by 2057. The size of the global middle class continues to increase as it went from 1.8 billion to 3.2 billion from 2009 to 2020. The global middle class is expected to grow by another 1.7 billion reaching 4.9 billion by 2030. The majority will come from Asia as they will account for 66% of the global middle class by 2030. Over the next two decades, the global GDP is expected to double. As the global population grows and the per capita GDP increases, industrialization in developing countries will occur as living standards increase. As this occurs, the demand and dependence on reliable energy will continuously increase. This is great news for ET because America has become the largest producer of oil and gas, and ET has one of the largest energy exporting business in the United States.
ET has four major exporting facilities which include The Nederland Terminal, Marcus Hook Complex, Lake Charles LNG Export Terminal and the Houston Ship Channel. These terminals create a strong foothold in the global exporting business for ET as they are strategically located on both the U.S. Gulf and East Coasts. On the East Coast, The Marcus Hook facility has four export docs which can accommodate very large crude carrier sized vessels. The remaining three export facilities sitting on the Gulf Coast provide ET with 12 ship and 11 barge docks in addition to 46 MMBbls of crude storage capacity. I believe there is tremendous growth in exporting as the global population will create large demands for energy products. I think of the midstream operators ET is positioned to export the largest amounts of energy products which will generate the largest returns in this business segment.
(Source: BP Statistical Review of World Energy 2020)
(Source: BP Statistical Review of World Energy 2020)
The distribution from Energy Transfer is safe, and the likelihood of a cut is low
ET’s distribution’s yield currently exceeds 18%, and I can’t wait for August 19th to roll around for my next payout. On the Q2 call, Tom Long indicated that ET’s coverage ratio was 1.54x, which resulted in excess cash flow of $448 million after distributions. In Q2, which was probably the worst business environment ET or any other company has faced, it generated distributable cash flow to its partners of $1.27 billion. Even in unprecedented times, ET pumped enough products through its system to keep the distributions flowing into our accounts. These numbers are positive in my eyes because I am looking at Q2 as a worst-case scenario as the country is currently reopening which should mean the demand for energy will start to inch back to previous levels.
Yes, the unit price of ET has decreased and has been stuck in an annoying downtrend, but the yield keeps paying out. I am in the red on my investment with ET probably like many other unit holders. I have viewed the most recent slump as an opportunity to get my price per unit lower while increasing the amount of cash this investment generates. As long as ET keeps doing what it’s doing and the distributions keep flowing, I will eventually turn green on this investment even if the unit price stays in the single digit territory. If management was going to cut its distribution, I would think Q2 would have been the time to do so. As the country reopens, Q3 numbers should be better with a larger coverage ratio and distributable cash flow to ET’s partners.
The push for clean energy is a serious long-term headwind not just for ET but the entire fossil fuel industry
None of my articles is political by any nature, and please do not turn the comment section into a political debate. I want to be clear, even though I am a unit holder of ET I am pro clean energy. I think renewable energy is great, and the more clean energy which is produced is a positive, not a negative. People should embrace solar and wind and take a positive stance on reducing greenhouse gas emissions. I don’t believe the timelines for net-zero emissions which I have read are realistic, and they are incredibly ambitious. I am not a scientist, that is just my opinion. The real question is how much change can become a reality when discussing net-zero emissions? Are these visions starting points in a negotiation or a hardline drawn in the sand? I did a lot of research, went down some rabbit holes, spoke with some engineers, and I am not convinced that the plans which are being put forward are attainable by 2040.
I am 39, and when I was in high school and college, not a single person I knew cared about climate change or brought it up in a discussion. Times have certainly changed over the last two decades with Greta Thunberg winning Time’s Person of the Year in 2019 and Ms. Ocasio-Cortez and Ed Markey submitting the H. RES. 109 (Green New Deal Resolution) on February 5th, 2019. In 2019, we had a teenager win Time’s Person of the year, and Ms. Ocasio-Cortez co-sponsor H. RES. 109 in Congress before her 30th birthday. The younger generations are speaking loud and clear and everyone better listen and not dismiss their visions. It isn’t just the younger generations as Democrats in the House of Representatives on June 30th, 2020, published a 538-page report named Solving The Climate Crisis which outlined their plan to reach net-zero emissions by 2050.
Having energy stocks in my portfolio, I try to research as much as I can about the changing landscapes. I have read The Green New Deal multiple times, I have read the Green Party of the United States (GPUS) website several times, and I have read the entire 538 page report on Solving The Climate Crisis. If you own energy stocks, you should really go to these links and read through them with an open mind to understand the headwinds which all traditional energy companies will be facing. In the co-sponsored resolution by Ms. Ocasio-Cortez & Ed Markey, it states on page 2 that, in order to avoid the most serious impacts of a changing climate, it will require “global reductions in greenhouse gas emissions from human sources of 40 to 60 percent from 2010 levels by 2030” and “net-zero global emissions by 2050.” On pages 6 and 7 of the resolution, they did add a 10-year national mobilization that would require “upgrading all existing buildings in the United States and building new buildings to achieve maximal energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.” In the GPUS website, they outline their vision for the Green New Deal which specifically states “transitioning to 100% green renewable energy (no nukes or natural gas) by 2030.” It would include a complete phase out of fossil fuels, fracked gas and nuclear power in its transition to 100% renewable by 2030. Some of the highlights from Solving the Climate Crisis to achieve net zero emissions by 2050 are requiring all new cars to be electric by 2035, eliminating emissions from the power sector by 2040, and the possibility of adopting a version of a carbon tax on emissions.
The common theme between H. Res. 109 and Solving The Climate Crisis is net-zero emissions by 2050. H.RES.109 indicates global scale and Solving The Climate Crisis indicates domestically. More detail is provided in the 538-page report and to achieve domestic net-zero emission by 2050, we would need to eliminate emissions from the power sector by 2040. Don’t get me wrong, this is a fantastic idea in theory, but I don’t see a path to achieve this. To achieve the elimination of emissions by 2040 natural gas, petroleum, nuclear and coal would need to become obsolete. According to the EIA, in 2019, the United States consumed 100.2 quadrillion British thermal units (BTU) of energy. Of this number, 11% came from renewable energy. 88% of the Btu’s consumed was from petroleum, natural gas, coal and nuclear. As a country, we would need to produce and utilize an additional 88.15 quadrillion BTU’s of energy from renewable sources to displace fossil fuels.
The first problem I will discuss briefly is utilization. Just about every home and building in the United States utilizes oil and/or gas. The 538-report indicated we would need to eliminate emissions from the power sector by 2040. This means we would need to convert every home and building by the means of ripping and replacing its oil and gas infrastructure and converting it to utilize a renewable source for heating, cooking, etc. Let’s speculate and say 1% of all buildings and homes are 100% self-sufficient without a need for oil and gas. As of 2019, there were 128.58 million homes in the United States, and per the University of Michigan Center For Sustainable Systems, there were 5.6 million commercial buildings which covered 87 billion square feet of floor space in 2012. There are 7,077 days until January 1st, 2040. Just doing some simple math by dividing the amount of homes and buildings in the United States by the number of days until 2040 gives a factual number of how many conversions would need to take place daily in the attempt to reach net-zero emissions by 2040. Assuming that 1% of current homes are not utilizing oil or gas, we would need to convert 127.94 million homes in the next 7,077 days, which is a rate of 17,987.03 homes per day. Using the same assumption with commercial buildings, we would need to convert 5.54 million commercial buildings, which would be a rate of 783.38 buildings over the next 7,077 days. Keep in mind that was the number of commercial buildings from 8 years ago. As more homes and buildings are built and the days decrease before this initiate starts, these numbers increase with more conversions being needed on a daily basis. This certainly isn’t impossible, but it would be an enormous effort, and I think the odds would favor the improbability of succeeding by 2040.
The second problem is production of renewable energy. In addition to converting every existing home and building, we need to produce 88 quadrillion Btu’s from renewable sources. I am going to apologize right now if my math is off. I am fairly certain I did all of the conversions correctly, and if I didn’t, I will be happy to update this section in the future. I am going to use wind and solar as the methods of production to replace fossil fuels. Starting with wind, I am going to use General Electric’s (GE) Haliade-X offshore wind turbine. In a press release from GE, the Haliade-X can provide enough clean energy to power 16,000 households and save up to 42,000 metric tons of CO2. This is the most powerful wind turbine I could find, and production will start at GE’s Saint-Nazaire factory in France during the second half of 2021 as testing is still occurring. This turbine is 260 meters tall with a rotor of 220 meters, and each blade is 107 meters. To put that into perspective, the Chrysler building is 319 meters or 1046 feet. This turbine is 260 meters or 853 feet.
The question is how many of the Haliade-X turbines will we need to replace 88 quadrillion Btu’s? By my calculations, we would need 4.54 million turbines. The chart below is step by step of how I derived at this number. There are 3.4 million Btu’s in one Megawatt. The GE Haliade-X is rated at 12 MW with a 63% capacity factor. We would need to figure out how many MW hours are produced in a year per turbine. The equation for the GE Haliade-X would be 12MW * 365 days * 24 hours * 0.63 = 66,225.60 MW hours produced annually per turbine. There are one million watts in a MW, so if we convert the MW hours produced to watts, one turbine would produce 66.23 billion watts annually. One watt is equal to 3.41 BTU hours, which would mean each turbine would produce 19.41 billion Btu hours annually. After figuring this out, a simple division of the 88 quadrillion Btu’s which need to be replaced by the amount of Btu hours one turbine produces shows that we would need 4,541,524 GE Haliade-X turbines to generate enough power to replace the 88 quadrillion Btu’s consumed in America in 2019. If we started today, we would need to install 641.73 wind turbines per day to accomplish the goal of replacing 88 quadrillion Btu’s by January 1st, 2040.
(Source: Steven Fiorillo)
Next, let’s look at solar farms. The most common number I found was 4 acres are needed to set up a solar farm with a yield of 1MW with an efficiency rate of about 18%. Using a similar methodology as wind power, a 4 acre solar farm would produce 1,576.8 MW hours annually. This would be 1.58 billion watts per year per 4 acre solar farm which converts to 462.11 million Btu hours annually generated. With the solar farms being four acres, each acre would produce 115.52 million Btu hours annually. To replace 88 quadrillion Btu’s consumed by the USA with solar, almost 763 million acres would need to be covered with solar panels. One acre is equal to 0.0015625 sq. miles. You would need 1.19 million sq. miles of land to produce 88 quads of power. The United States is 3.8 million sq. miles, so we would need to place solar panels on 31.37% of America’s surface to replace the amount of Btu’s produced by fossil fuels to eliminate them. If we started today, we would need to install 168.45 sq. miles of solar panels per day to generate enough power by solar to eliminate the need for fossil fuels by 2040.
(Source: Steven Fiorillo)
(Source: Bing Search: Solar Farm in Austin Texas)
Changing the energy mix could certainly be detrimental to ET and there are looming political risks to their business model. I think it would be foolish to say it is impossible to eliminate fossil fuels in the future. These risks need to be taken very seriously, but, in my opinion, getting to a net-zero emission domestically by 2040 is unlikely and pushing that to a global goal is improbable. Just looking at the domestic landscape over the next 7,077 days, we would need to convert 17,987.03 homes and 783.38 commercial buildings on a daily basis to reduce their dependency on oil and gas. In addition, we would need to replace 88 quadrillion Btu’s of power consumption on an annual basis with renewable forms of energy. If my math is correct, we would need to install over 4.5 million GE Haliade-X wind turbines at a rate of 641.73 per day to replace fossil fuels or install solar panels on 1.19 million square miles of land, which would cover 31.37% of the United States. It’s not impossible, but I think many would place a wager this would be an improbable accomplishment unless the technology of harnessing power from wind and solar advances exponentially in the near future. I think the more probable scenario is renewables replace coal by 2040, and we have an energy mix which includes petroleum, natural gas, and renewables.
I am currently bullish on ET as I believe units can see a 51.52% return over the next year as it climbs back to $10 per unit. While you are waiting for this to occur, ET is paying you 18% to wait it out, and if it reaches $10, your distribution will still yield 12%. It’s hard to dispute that the global population is growing, the middle class is expanding, and the demand for energy is increasing. ET has a world-class transportation system for energy domestically with exceptional exporting facilities. As the global energy demand grows, ET should be in a great position to fill the needs of developing nations from energy produced right here in America which has become the largest oil and gas producing nation. There are certainly risks, and energy is a hated sector. Any investments in ET should be closely watched and revaluated frequently as domestic energy regulations could change quickly. As far as the push to renewables, I don’t believe the 2040 goal of net-zero emissions will be met, and the more likely scenario is that renewables will replace coal as they increase their position in the global energy mix. ET is certainly a buy in my eyes, but do your own research because energy is getting hammered.
Disclosure: I am/we are long ET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Additional disclosure: Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fits into their portfolio parameters.