Energy Transfer Partners (NYSE:ETP) is a roughly $20 billion company and a significant part of the midstream oil market. The company has had a difficult time since the start of the oil crash, with its stock price dropping by more than 60%. Despite that, it has been undertaking a number of prudent steps towards long-term strength. The company’s recent acquisition by Sunoco Logistics Partners, combined with its strong asset growth profile, means it is undervalued at the present time.
(Energy Transfer Partners – BIZJ Media)
Acquisition by Sunoco Logistics Partners
Sunoco Logistics Partners has recently acquired Energy Transfer Partners. That acquisition will be immediately accretive to both companies and will support their long-term growth.
(Energy Transfer Partners Sunoco Logistics Partners Acquisition – Energy Transfer Partners Investor Presentation)
On April 26, 2017, Energy Transfer Partners voted to adopt the merger, with 88% of the units voting in favor of the merger. As a result, the merger was able to close on April 28th, or almost four months before today. The terms of the transaction resulted in Energy Transfer Partners receiving 1.5 units of Sunoco Logistics Partners per unit of Energy Transfer Partners.
The combined entity, with 1.1 billion total units outstanding, now trades under the ticker ETP.
The merger expands Energy Transfer Partners’ footprint and allows it to significantly expand its assets. That allows the company to capitalize on synergies while continuing its growth. The company anticipates significant synergies in major American plays, such as the Permian, Marcellus, Utica, and Gulf Coast basins. This combined business will create enough value to mitigate the difficult oil environment.
(Energy Transfer Partners Sunoco Logistics Partners Merger – Energy Transfer Partners Investor Presentation)
This combined company offers investors an incredible dividend of more than 11.8%. At the same time, it has an adjusted EBITDA of $1.4 billion. For a $22 billion company this is a very strong market cap-to-EBITDA ratio of just under 16 and shows how investors tend to leave Energy Transfer Partners to the side as they look at larger midstream companies like Kinder Morgan (NYSE: KMI) and Enterprise Products Partners (NYSE: EPD).
In fact, the new company’s strength and size means that it can pay this 11.8% dividend with a coverage ratio of 1.13x, which also shows there is a little room for growth. On top of this, the combined company managed to raise more than $5 billion from Bakken equity and debt financing that it can use for future growth. This future growth can allow it to grow its dividend even further.
Energy Transfer Partners’ Strong Asset Growth Profile
Energy Transfer Partners already has an incredible asset profile. The company is focused on significant asset growth to make itself even more profitable in the long term.
(Energy Transfer Partners Asset Profile – Energy Transfer Partners Investor Presentation)
It has an impressive distribution of assets that merge well with Sunoco Logistics Partners’ assets. The combined company also has noticeable new growth opportunities in plan throughout the United States. Among these is the Dakota Asset Pipeline, a major underground oil pipeline to transfer oil from the Bakken shale oil fields all the way towards Illinois.
The Dakota Asset Pipeline has had to deal with a significant amount of protests due to its passage over Native American land. This pipeline, which is a project valued at almost $3.8 billion, is valued at almost 20% of Energy Transfer Partners’ market cap. That means that the project, once it is finally completed and pushed through, will generate significant cash flow for Energy Transfer Partners in the coming years.
(Energy Transfer Partners Oil Movement – Energy Transfer Partners Investor Presentation)
Looking at the specifics of Energy Transfer Partners with Lake Charles LNG and Sunoco Logistics Partners, we can see the truly powerful vertically integrated firm this is. The company starts its vertical integration by gathering 445 thousand barrels/day of natural gas liquids (NYSE:NGL) and an additional 10 million mmbtu/day of gas. It then combines this into its transportation network of 15 million mmbtu/d of natural gas.
Overall, the company’s entire inventory transports more than 2.7 million barrels of crude oil per day, or almost 30% of all oil consumption in the United States. In the future, it plans to combine this into one of the largest planned LNG export facilities in the US. LNG export facilities have long been massive multi-billion dollar facilities, and they have the ability to generate massive long-term cash flows.
This vertical integration continues onward to Sunoco Logistics Partners with the company’s fuel sales. The combined company sells more than 7.8 billion gallons of motor fuel annually worth tens of billions of dollars. Through vertical integration, it can collect profits at each and every step of this process, and that means significant, efficient cash flow for Energy Transfer Partners.
Looking past Energy Transfer Partners’ Bakken Oil Pipeline, we get to its Mariner East System through Pennsylvania.
(Energy Transfer Partners Growth Projects – Energy Transfer Partners Investor Presentation)
The company sees its mariner Pipeline system as a comprehensive Marcellus Shale solution, making it a comprehensive solution to one of the largest shale plays in the United States. The goal of the assets, which are supported by long-term, fee-based contracts, is to transport NGL from Ohio / Western Pennsylvania to the Marcus Hook Industrial Complex on the East Coast.
These asset plays are spread across the Mariner East 1, 2, and 2x. The Mariner East 1 is currently in service with approximately capacity of 70 thousand barrels/day. The Mariner East 2 is anticipated to come into production sometime around now with an initial capacity of 275 thousand barrels per day, expandable to 450 thousand barrels per day. That is six times the current Mariner East 1 production.
And lastly, there is the Mariner East 2x. That portion of the plan is expected to come into service next year, and according to Energy Transfer Partners, it’s currently open season to offer transportation, storage, and terminaling services here. As a result, the company anticipates that this aspect of its production is expandable to 250 thousand barrels per day, a significant growth in production.
Here, we can see that Energy Transfer Partners has significant anticipated growth projects. 500 thousand barrels per day in production is enough to expand the company’s production by almost 20%. And that means a significant expansion in both cash flow and the company’s payments to shareholders and shows the strength of Energy Transfer Partners’ growth profile.
(Energy Transfer Partners Growth Projects – Energy Transfer Partners Investor Presentation)
This shows an overview of Energy Transfer Partners’ growth projects in 2017 and 2018. These are large projects, and as an investor, I am impressed to see the company making such meaningful progress forward. As we can see here, a significant number of these projects involve hundreds of thousands of barrels per day in additional transportation, if not more. That is significant transportation.
In fact, a significant number of these projects have the potential to affect the total amount of crude that Energy Transfer Partners moves by the mid-single digits, if not more. That, combined with the fact that all these projects are anticipated to come on-line in the next year to two, means Energy Transfer Partners has significant growth ahead of it – growth that has yet to be priced into the company’s stock.
Now that we have discussed Energy Transfer Partners and how the company has strong growth potential ahead if it, especially thanks to its acquisition by Sunoco Logistics Partners, let’s discuss my valuation of the company.
For starters, as we discussed above, the acquisition by Sunoco Logistics Partners, as I discussed, makes it a major player among the midstream companies. Yet, the company is still trading at a yield of 12.04%, noticeably above major peers such as EPD with a yield of 6.71% and KMI with a yield of 2.68% (10.72% if you don’t count the company’s poor financial decisions that made it cut the dividend).
Adjusting Energy Transfer Partners to the midpoint of these major peers, we get that the stock price should recover to $25.19.
Alternatively, we can look at the company’s financials and its growth potential, which, as I discussed above, isn’t really priced into the stock. As we saw above, Energy Transfer Partners has 2.7 million barrels per day in oil movement, with a number of projects planned that are anticipated to grow oil movement by several hundred thousand barrels per day.
Assuming the company manages to achieve 20% growth in the next year or two (that comes with a 20% increase in the dividend and stock price), it would result in the stock price increasing to almost $22 over the next year as it continues to maintain an impressive dividend. As a result, my near-term valuation estimate for Energy Transfer Partners is roughly $24 per share over the next year.
Energy Transfer Partners, like all other companies involved in the oil industry, has had a difficult time since the start of the oil crash. It has continued to reward investors by offering out a significant dividend, but despite this, the stock price has dropped more than 60% since the start of the oil crash. However, a lot has been changing for the company, and this bodes well for it going forward.
For starters, Energy Transfer Partners has recently been acquired by Sunoco Logistics Partners. This new company has significant vertical integration that will lead to significant growth. It has an enormous number of anticipated growth projects that should come on-line in the next 1-2 years. These growth projects should allow the company to grow its dividend further and, as a result, make it an even better investment.
As a result of its strong asset portfolio and the recent acquisition by Sunoco Logistics Partners, Energy Transfer Partners is a strong investment currently.
Disclosure: I am/we are long ETP, EPD, KMI.
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.