ET; A transfer of energy and a transfer of energy sources
DISCLAIMER
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. I am obviously not rich, so obviously I haven't made it with my own thinking, so definitely don't put faith in me. But maybe read and learn some things about a company changing its business with the change in energy demands.
Thesis
This is a great case study on doing that research to find the hidden gems. Energy Transfer isn't an exciting company, nor is the field, but the fundamentals are astounding. Not only that, but by working primarily in transport (rather than production), they avoid a significant amount of the future rain clouds over crude oil and natural gas production, and can switch to transporting renewable sources from future companies. Energy Transfer has everything neat and tidy, making cuts while struggling, but finding the capital to advance the business. On top of all of that, pulling off a record quarter with the giant blizzard that crushed much of the southern states; ET is hustling and making it work.
While some of ET's business is threatened by any Green New Deal that comes out of Congress; ET has done its job in diversifying business assets such that any particular asset is under 30% of it's total business value. If should one of these be crushed by any legislation, policy change or overall public demand, the share price could be pushed far more than just 30% as investors hop off for a more ESG energy company. However, it is important to note that government grants get spread out, and they rarely all go to small companies that don't have the built-in fundamental worth to carry on big projects. ET has started to build up it's solar plant business, and according to their most recent investor presentation, are in advanced talks for a significantly larger solar project.
ET has everything going for it right now, attractive fundamentals, attractive merger plans, attractive growth of natural gas and solar energy, and the ability to make a metric ton of cash every quarter. ET made $3.6 billion in cash last quarter, which they then used to reduce debt and give shareholders a big dividend. While I doubt the dividend alone is causing the price increase, but rather a change in financial forecasts and an increase in debt rating outlook from Moody's to stable (from negative, ouch). If there isn't some major analyst calling for a higher price now, which Citigroup did this morning before publishing this idea, then they will soon. Another major point to add is that diversification of investments across multiple sectors is an important move for long term investments. Stocks may go up, but not all at the same time and at the same sector; tech gets its day, but so does energy.
What is Energy Transfer LP
An LP (limited partners) is the same way as saying a single company, but with some tax advantages in this case. The important bones of ET are ET(the energy transfer/pipelines/oil holding stations/etc), Sunoco(the worst gas station), and a small compressor company. ET itself is involved with crude oil, natural gas and solar, where they build, own and operate the pipelines and storage facilities, and transporting to delivery stations. They also manage several solar fields, built a solar plant for 20% of their energy needs, and are looking to build more. Current acquisition with ENBL suggests a hard shift to natural gas, mirrored by a 45% share of EBITDA in the business, straying far from their Annual report suggesting not letting any single business raise more than 30% of EBITDA.
As an added bonus, the executive chairman of ET has made a recent statement that they are looking to acquire a company in the chemicals business (finance.yahoo.com/news/1-pipeline-operator-energy-transfer-183404232.html). As mentioned in the thesis, making ~3 billion in cash every quarter makes it easy to acquire small OR big companies. I would assume any acquisition here is to take over the crumbling pillar of crude oil in underlying assets.
Dakota Pipeline
en.wikipedia.org/wiki/Dakota_Access_Pipeline
This is a rough patch, and it isn't even close to over. Personal beliefs aside, it is going to be hard imaging the Dakota Access Pipeline survives much longer, if not just the current protests, the Army Corps of Engineers doing environmental impact surveys that are likely to turn up red flags, or the current congressional legislation lineup tackling the pipeline and crude oil, then the natural death of crude oil as a whole. The pipeline is likely to come to some sort of head this year, hopefully not falling in line with the merger timing for ET and ENBL. My brain is telling me the CEO can't be so stupid to think it gets to flow freely forever, which is why ET is rotating so hard to natural gas. Even if the dakota access pipeline gets shut down, ET's overall value won't be hit hard as it slowly exits the crude oil business, or at the very least limits exposure, but it will be a hit, likely being the negative catalyst for an impulse wave in the current series.
ENBL Merger
Any potential investor should read the official statement from ET: ir.energytransfer.com/static-files/74c2a418-8a5e-40c4-a0ff-6ff710fa1282
The deal is a simple merger valuing Enable Midstream partners (ENBL) at .8595 to 1 ET. That is, at the end of the merger, ET will give .8595 shares of the merged entity (ET Operating L.P. ticker to be formally decided in S-4). Theoretically, if ET is worth $10, ENBL should be worth $8.595. Keeping an eye on price variations on either for a point of entry is a good way to make small gains, but larger institutions keep these types of deals weighted well, so the opening might never arise.
The basics of the deal are simple, take on a modest increase in natural gas pipelines in areas uncontrolled, reduce their administrative costs and personnel to streamline operations, while removing a potential customer in a quickly growing business. Natural gas, either renewable or not, is going to be a huge stop gap between coal plants and more environmentally friendly alternatives. Furthermore, with companies developing carbon neutral/negative natural gas, pipelines in farming areas (where natural gas is made from cow poop) means easy access to early adoption and succinct market control. It seems a tad bit costly considering the current value of ET vs the more prospective value of ENBL, but it could be a critical part of ET's rotation into natural gas dominance.
The interesting part of this merger is the clear history of mergers for ET. I think their claims that they are all successful is a tad bit of a stretch considering their massive amount of debt and profitability variance across the years, but it is clear they have a game plan, and with that focused on natural gas and building up their solar, I believe ET has the ability to keep rotating through the market evolution cycles.
Fundamentals
The first quarter results combined with their quarter over quarter decrease in costs, increase in profits and continued growth suggest a company gaining steam. Long term debt suggests a looming crisis. Even after paying off more than $3.5 billion in debt this quarter, the company has over $47.7 billion breathing down its neck. I normally wouldn't be so worried about this, especially with Moody's rating change from negative to stable, but should a sustained market incident happen again like it did in Q1 2020, I am unsure how many banks are willing to give ET a loan, especially if they get hit by any market affairs. This means that the company would be forced to go to the market for capital raise, leading to dilution. What is the likelihood of that? Probably minute, but the concern needs to be raised and understood. ET has an annual dilution rate of 2%, and at 2.7 billion shares, that can be a lot.
ir.energytransfer.com/news-releases/news-release-details/energy-transfer-reports-first-quarter-2021-results
macrotrends.net/stocks/charts/ET/energy-transfer-lp/stock-price-history
Share Float & Investors
2.7 billion shares spread across ~652 institutional holders with ~37% institutional ownership (+Insider). However, most recent filings show bigger banks selling ~40 million shares, and larger funds selling more. Interestingly, the buyers look to be smaller funds taking on a much smaller exposure, suggesting a switch to more bullish investors with less ability to cause drastic shifts down, but a more regular level of volatility at smaller rates is possible. The great news being, if banks ever look to buy back in, shares become scarcer the more bullish the underlying investors become.
Important to note, insider buying has been heavy this past 12 months, likely insiders knowing the market bounce back will come with their successful rotations. Overall the investor pool looks healthy, less big owners means less power 1 person has to drive down, but the more regular volatility as smaller players tend to rotate assets more. This could mean a more actively trading float into more often Elliot waves, but that remains to be seen.
whalewisdom.com/stock/ete-ut
nasdaq.com/market-activity/stocks/et/insider-activity
Bear Theory
The bear theory is rather straight forward and multi-pronged: The company has the highest debt-margin ratio of its peers, and at >$47 billion, any failure to payback owed dues would lead to a game over. Furthermore, should a market event happen hurting the business for an extended period (like the Q1 2020 oil "crisis") combined with any collapse of big money lenders (like a possible repo collapse happening), ET might just find it impossible to take on any healthy new debt. Furthermore, any institution looking to short ET into the ground at the same time could easily tip the scale into delisting territory with an appropriate lack of confidence by underlying investors and the market as a hole.
The Dakota Access Pipeline is going to be an issue. There is little way to keep it going combined with a PR meltdown. Shorting at the right time will cause a drop, there is very little ET could do to prevent that save from them pulling the pipeline themselves to lessen backlash.
Crude oil is bad, natural gas ain't too much better, and their solar plans are a little little and a lot of late. It is too easy for anyone else to rotate into solar to take the legs out from under them, develop an alternative system to avoid the need of disastrous pipelines carrying anything, or just to get more widespread adoption of existing solar, wind, hydro and nuclear technologies. Sure, ET is rotating well, but in a collapsing business, whether or not they want to admit it, times are changing.
Bull Theory
The bull theory rests on fundamentals and a more subdued timeline of future energy technologies allowing widespread rejection of crude oil and natural gas. Furthermore, a recent expansion into solar, and late stage negotiations for even more, and a quarterly income of $3 billion cash, at least for the short term, suggests expansion into any field ET very well pleases. Making the move into chemicals is just the right kind of move they can make to continue the Fees and transportation business over production. Much of the infrastructure servicing crude oil and natural gas demands can be rotated to more economically desired chemicals, or even renewable sources of oil and gas. ET keeping the business in lines with service rather than production ensures a limit to exposure of more nuanced issues in any one field, and provide access to a greater market share geologically rather than economically. The continued spread of current technologies, and the continued adoption and acquisition of next wave ensures a healthy growth through, not just the year, but the decade.
Lastly, with a beta over 2, ET accentuates the bullish tone of the equities market. If ARK, JP Morgan et al are to be believed, then a continued bull stock market will see a continued rise in ET's value.
Disclaimer
I am going to be real honest with you; congratulations for getting to the end. Thank you for your time, I hope it was worth it. If you have any suggestions, I would love to hear it. Please don’t make an investment decision on my information alone, always double check. I am not a financial analyst, I do not get paid to write any of this, and I do not currently (5/21/21) have an investment in ET or it's stock price. Thanks.
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. I am obviously not rich, so obviously I haven't made it with my own thinking, so definitely don't put faith in me. But maybe read and learn some things about a company changing its business with the change in energy demands.
Thesis
This is a great case study on doing that research to find the hidden gems. Energy Transfer isn't an exciting company, nor is the field, but the fundamentals are astounding. Not only that, but by working primarily in transport (rather than production), they avoid a significant amount of the future rain clouds over crude oil and natural gas production, and can switch to transporting renewable sources from future companies. Energy Transfer has everything neat and tidy, making cuts while struggling, but finding the capital to advance the business. On top of all of that, pulling off a record quarter with the giant blizzard that crushed much of the southern states; ET is hustling and making it work.
While some of ET's business is threatened by any Green New Deal that comes out of Congress; ET has done its job in diversifying business assets such that any particular asset is under 30% of it's total business value. If should one of these be crushed by any legislation, policy change or overall public demand, the share price could be pushed far more than just 30% as investors hop off for a more ESG energy company. However, it is important to note that government grants get spread out, and they rarely all go to small companies that don't have the built-in fundamental worth to carry on big projects. ET has started to build up it's solar plant business, and according to their most recent investor presentation, are in advanced talks for a significantly larger solar project.
ET has everything going for it right now, attractive fundamentals, attractive merger plans, attractive growth of natural gas and solar energy, and the ability to make a metric ton of cash every quarter. ET made $3.6 billion in cash last quarter, which they then used to reduce debt and give shareholders a big dividend. While I doubt the dividend alone is causing the price increase, but rather a change in financial forecasts and an increase in debt rating outlook from Moody's to stable (from negative, ouch). If there isn't some major analyst calling for a higher price now, which Citigroup did this morning before publishing this idea, then they will soon. Another major point to add is that diversification of investments across multiple sectors is an important move for long term investments. Stocks may go up, but not all at the same time and at the same sector; tech gets its day, but so does energy.
What is Energy Transfer LP
An LP (limited partners) is the same way as saying a single company, but with some tax advantages in this case. The important bones of ET are ET(the energy transfer/pipelines/oil holding stations/etc), Sunoco(the worst gas station), and a small compressor company. ET itself is involved with crude oil, natural gas and solar, where they build, own and operate the pipelines and storage facilities, and transporting to delivery stations. They also manage several solar fields, built a solar plant for 20% of their energy needs, and are looking to build more. Current acquisition with ENBL suggests a hard shift to natural gas, mirrored by a 45% share of EBITDA in the business, straying far from their Annual report suggesting not letting any single business raise more than 30% of EBITDA.
As an added bonus, the executive chairman of ET has made a recent statement that they are looking to acquire a company in the chemicals business (finance.yahoo.com/news/1-pipeline-operator-energy-transfer-183404232.html). As mentioned in the thesis, making ~3 billion in cash every quarter makes it easy to acquire small OR big companies. I would assume any acquisition here is to take over the crumbling pillar of crude oil in underlying assets.
Dakota Pipeline
en.wikipedia.org/wiki/Dakota_Access_Pipeline
This is a rough patch, and it isn't even close to over. Personal beliefs aside, it is going to be hard imaging the Dakota Access Pipeline survives much longer, if not just the current protests, the Army Corps of Engineers doing environmental impact surveys that are likely to turn up red flags, or the current congressional legislation lineup tackling the pipeline and crude oil, then the natural death of crude oil as a whole. The pipeline is likely to come to some sort of head this year, hopefully not falling in line with the merger timing for ET and ENBL. My brain is telling me the CEO can't be so stupid to think it gets to flow freely forever, which is why ET is rotating so hard to natural gas. Even if the dakota access pipeline gets shut down, ET's overall value won't be hit hard as it slowly exits the crude oil business, or at the very least limits exposure, but it will be a hit, likely being the negative catalyst for an impulse wave in the current series.
ENBL Merger
Any potential investor should read the official statement from ET: ir.energytransfer.com/static-files/74c2a418-8a5e-40c4-a0ff-6ff710fa1282
The deal is a simple merger valuing Enable Midstream partners (ENBL) at .8595 to 1 ET. That is, at the end of the merger, ET will give .8595 shares of the merged entity (ET Operating L.P. ticker to be formally decided in S-4). Theoretically, if ET is worth $10, ENBL should be worth $8.595. Keeping an eye on price variations on either for a point of entry is a good way to make small gains, but larger institutions keep these types of deals weighted well, so the opening might never arise.
The basics of the deal are simple, take on a modest increase in natural gas pipelines in areas uncontrolled, reduce their administrative costs and personnel to streamline operations, while removing a potential customer in a quickly growing business. Natural gas, either renewable or not, is going to be a huge stop gap between coal plants and more environmentally friendly alternatives. Furthermore, with companies developing carbon neutral/negative natural gas, pipelines in farming areas (where natural gas is made from cow poop) means easy access to early adoption and succinct market control. It seems a tad bit costly considering the current value of ET vs the more prospective value of ENBL, but it could be a critical part of ET's rotation into natural gas dominance.
The interesting part of this merger is the clear history of mergers for ET. I think their claims that they are all successful is a tad bit of a stretch considering their massive amount of debt and profitability variance across the years, but it is clear they have a game plan, and with that focused on natural gas and building up their solar, I believe ET has the ability to keep rotating through the market evolution cycles.
Fundamentals
The first quarter results combined with their quarter over quarter decrease in costs, increase in profits and continued growth suggest a company gaining steam. Long term debt suggests a looming crisis. Even after paying off more than $3.5 billion in debt this quarter, the company has over $47.7 billion breathing down its neck. I normally wouldn't be so worried about this, especially with Moody's rating change from negative to stable, but should a sustained market incident happen again like it did in Q1 2020, I am unsure how many banks are willing to give ET a loan, especially if they get hit by any market affairs. This means that the company would be forced to go to the market for capital raise, leading to dilution. What is the likelihood of that? Probably minute, but the concern needs to be raised and understood. ET has an annual dilution rate of 2%, and at 2.7 billion shares, that can be a lot.
ir.energytransfer.com/news-releases/news-release-details/energy-transfer-reports-first-quarter-2021-results
macrotrends.net/stocks/charts/ET/energy-transfer-lp/stock-price-history
Share Float & Investors
2.7 billion shares spread across ~652 institutional holders with ~37% institutional ownership (+Insider). However, most recent filings show bigger banks selling ~40 million shares, and larger funds selling more. Interestingly, the buyers look to be smaller funds taking on a much smaller exposure, suggesting a switch to more bullish investors with less ability to cause drastic shifts down, but a more regular level of volatility at smaller rates is possible. The great news being, if banks ever look to buy back in, shares become scarcer the more bullish the underlying investors become.
Important to note, insider buying has been heavy this past 12 months, likely insiders knowing the market bounce back will come with their successful rotations. Overall the investor pool looks healthy, less big owners means less power 1 person has to drive down, but the more regular volatility as smaller players tend to rotate assets more. This could mean a more actively trading float into more often Elliot waves, but that remains to be seen.
whalewisdom.com/stock/ete-ut
nasdaq.com/market-activity/stocks/et/insider-activity
Bear Theory
The bear theory is rather straight forward and multi-pronged: The company has the highest debt-margin ratio of its peers, and at >$47 billion, any failure to payback owed dues would lead to a game over. Furthermore, should a market event happen hurting the business for an extended period (like the Q1 2020 oil "crisis") combined with any collapse of big money lenders (like a possible repo collapse happening), ET might just find it impossible to take on any healthy new debt. Furthermore, any institution looking to short ET into the ground at the same time could easily tip the scale into delisting territory with an appropriate lack of confidence by underlying investors and the market as a hole.
The Dakota Access Pipeline is going to be an issue. There is little way to keep it going combined with a PR meltdown. Shorting at the right time will cause a drop, there is very little ET could do to prevent that save from them pulling the pipeline themselves to lessen backlash.
Crude oil is bad, natural gas ain't too much better, and their solar plans are a little little and a lot of late. It is too easy for anyone else to rotate into solar to take the legs out from under them, develop an alternative system to avoid the need of disastrous pipelines carrying anything, or just to get more widespread adoption of existing solar, wind, hydro and nuclear technologies. Sure, ET is rotating well, but in a collapsing business, whether or not they want to admit it, times are changing.
Bull Theory
The bull theory rests on fundamentals and a more subdued timeline of future energy technologies allowing widespread rejection of crude oil and natural gas. Furthermore, a recent expansion into solar, and late stage negotiations for even more, and a quarterly income of $3 billion cash, at least for the short term, suggests expansion into any field ET very well pleases. Making the move into chemicals is just the right kind of move they can make to continue the Fees and transportation business over production. Much of the infrastructure servicing crude oil and natural gas demands can be rotated to more economically desired chemicals, or even renewable sources of oil and gas. ET keeping the business in lines with service rather than production ensures a limit to exposure of more nuanced issues in any one field, and provide access to a greater market share geologically rather than economically. The continued spread of current technologies, and the continued adoption and acquisition of next wave ensures a healthy growth through, not just the year, but the decade.
Lastly, with a beta over 2, ET accentuates the bullish tone of the equities market. If ARK, JP Morgan et al are to be believed, then a continued bull stock market will see a continued rise in ET's value.
Disclaimer
I am going to be real honest with you; congratulations for getting to the end. Thank you for your time, I hope it was worth it. If you have any suggestions, I would love to hear it. Please don’t make an investment decision on my information alone, always double check. I am not a financial analyst, I do not get paid to write any of this, and I do not currently (5/21/21) have an investment in ET or it's stock price. Thanks.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.