Unlocking High-Yielding Stocks: A Rare Gem in the Energy Sector
When searching for high-yielding stocks, investors often come across companies with deteriorating fundamentals, making them less appealing. However, Energy Transfer (ET), a leading U.S. midstream energy company, stands out as an exception to this rule with its impressive 7.6% distribution yield.
Strong Third-Quarter Results
Energy Transfer’s recent third-quarter earnings report reveals a robust performance, supporting a bullish outlook. The company’s total revenue increased by 0.2% year-over-year to $20.8 billion, driven by record-breaking volumes across its business segments. Crude oil transportation volumes surged 25%, while crude oil exports soared 49%. Midstream gathered and produced volumes grew by 6% and 26%, respectively, and NGL fractionation volumes climbed 12%.
Adjusted EBITDA Growth
The company’s adjusted EBITDA rose by 11.8% over the year-ago period to nearly $4 billion, demonstrating respectable per-unit growth for a midstream operator. This growth is even more impressive considering the 8.6% uptick in the weighted average outstanding unit count.
Growth Prospects
Energy Transfer’s acquisition of WTG Midstream Holdings in July is expected to provide incremental revenue from gathering and processing activities, resulting in an additional $0.04 in distributable cash flow per unit in 2025, rising to $0.07 by 2027. The company’s pipeline of projects, including the Nederland Flexport Expansion and the Red Lake IV processing plant, will further boost its growth prospects.
Attractive Distribution Yield
Energy Transfer’s outsized distribution yield of approximately 6x the S&P 500 index’s yield is a significant draw for income-seeking investors. The company is committed to increasing its distribution by 3% to 5% annually, with a realistic target given its strong DCF coverage.
Financial Health
Energy Transfer’s BBB credit rating from S&P Global, combined with its stable outlook, underscores its solid financial health. The company’s leverage ratio is expected to remain in the lower half of its targeted range in 2024, providing room for growth.
Valuation
With a forward price-to-OCF ratio of 5.3, below its 20-year average, Energy Transfer’s valuation appears attractive. A reversion to the 20-year average could lead to a $20 unit price in the near term, making it a compelling investment opportunity.
Wall Street Consensus
Analysts have a Strong Buy rating consensus on Energy Transfer, with all eight analysts covering the stock assigning Buy ratings in the last three months. The average 12-month ET price target of $20.29 implies an 18.83% upside from the current unit price.
A Rare Gem in the Energy Sector
Energy Transfer offers the best of both worlds: massive starting income and significant capital appreciation potential. With its strong cash flow generation, backlog of projects, and attractive valuation, I assign a Buy rating to this rare gem in the energy sector.
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