Is It Time To Energize?



It goes without saying that the Energy Sector has recently been under a lot of stress.  Consequently, even the AAA rated industry behemoth Exxon Mobil (XOM) is seeing some chinks in its armor.  S&P Capital IQ recently downgraded 10 U.S. oil companies and placed Exxon on credit watch.  Consequently, I feel safe in saying that the Energy Sector currently possesses a great deal of risk.  However, as the old saying goes, great opportunity often comes with times of enhanced risk.

Therefore, my MisterValuation stock of the week offering is the midstream MLP Energy Transfer Partners, L.P. (ETP).  When the energy crisis started, midstream MLPs were considered relatively immune to the energy crisis because their businesses were not directly related to the underlying commodity pricing.  From an operating perspective, that optimistic view of midstream MLPs especially, has panned out thus far.  However, from a stock price action, midstream MLPs have suffered significant price deterioration.  ETP is no exception.

Thus, the million-dollar question is what is going to happen to the future pricing, and perhaps more importantly, to future dividend distributions of midstream MLPs in general, and ETP specifically?  Additional important questions would relate to the Energy Sector itself.  A few examples would be: Have energy prices bottomed, or at least, are they near bottoming?  More to the point; are we at or near a bottoming of the stock prices of energy companies in general, and midstream MLPs like ETP more specifically?

Unfortunately, I do not have the answers to those important questions, nor do I believe anyone else does either.  On the other hand, I do believe that the world continues to rely on oil and gas for its energy needs, and that will probably continue for some time.  Notwithstanding all the talk about alternative energy sources, I believe they are still a long ways away from exerting a meaningful impact on energy usage and supply.

Energy Transfer Partners, L.P. (ETP)

Personally, I have always found it difficult to analyze or evaluate MLPs, even the more conservative midstream MLPs.  These companies have complex business structures, are capital intensive and difficult to evaluate utilizing standard metrics.  As a result, I have been very sparing in my utilization of MLPs in portfolios of my own or clients.  However, I also consider their primary allure to be their prodigious dividend distributions.  There are also tax benefits associated in taxable accounts, but my primary attraction has been for their dividends (distributions in the case of MLPs).

Therefore, when I have attempted to analyze or evaluate MLPs, my focus has primarily been on their dividends and cash flows.  Regular contributor to Seeking Alpha and friend Ray Merola posted a comment in a recent article on ETP that I thought was both pertinent and succinct:

“ETP investors should ask the question, “Are the units’ price-and-cash flows aligned?”

Simplistically, the MLP business model includes collecting transportation / service fees and paying distributions from that. Distribution growth is funded by initiating new pipeline and expansion projects with capital raised via debt or equity.

Not often mentioned is ETP has largely pre-funded its 2016 capital program.

The February earnings announcement will offer up some answers: volumes, revenues, cash flows, etc.”

Ray posed what I consider an extremely relevant question, and provided an interesting insight into the near-term future of ETP and its ability to maintain its current distribution.  On January 27, 2016, ETP released a press release titled “Energy Transfer Partners Announces Quarterly Cash Distribution and 2016 Capital Expenditure Update” that contained a certain amount of color on the company’s near-term future.  If any of you are interested in this MLP, I suggest the press release is worth reading.

The analyze-out-loud video associated with this article will illustrate my own thoughts on this MLP, and illustrate the process I utilize when generally evaluating MLPs.  I will state in advance, that my process for analyzing MLPs is different than my normal approach, and I must add – not as straightforward as my normal due diligence process.

Category: Research Articles


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