As of the time of this writing, the largest holding in My Portfolio is pipeline/midstream operator Energy Transfer (NYSE:ET), accounting for 19.6% of my holdings in total. Needless to say, I could be described as very bullish on the company and its prospects moving forward. Of course, this picture can change over time, and what better time than when new data comes in. Fortunately for me though, when the company announced financial results covering the third quarter of its 2022 fiscal year, results that were made public on November 1st, the overall picture came out even stronger than I could have hoped. In addition to boasting strong cash flows, the company increased guidance for the year. Debt continues to fall and shares are trading at incredibly cheap levels, both on an absolute basis and relative to similar firms. Due to all of these factors, I still feel very comfortable about my ‘strong buy’ rating on the stock.
If you were to look only at the headline news when it comes to Energy Transfer, you might come away with a rather bearish opinion. For instance, revenue of $22.94 billion missed analysts’ expectations by $1.1 billion even though it came in stronger than the $16.66 billion generated the same time last year. Meanwhile, earnings per share of $0.29 missed expectations by $0.08 per share. Normally, a miss of this magnitude on both the top and bottom lines might warrant significant downside for investors. But as I stated in a prior article, the revenue and earnings of a company in this space has very little meaning. Instead, what matters is the amount of cash flow the company in question can generate. And that can be detached significantly from sales and profits.
Digging in deeper, we see that the overall quarter for the company was impressive. Operating cash flow for the firm came in at $2.99 billion. That’s up nicely from the $2.26 billion the company generated only one quarter earlier. If we adjust for changes in working capital, the metric rose from $1.95 billion last year to $2.47 billion this year. Another metric to pay attention to is distributable cash flow, also known as DCF. During the quarter, this totaled $1.58 billion. That represents an increase of 20.5% over the $1.31 billion generated the same time last year. Meanwhile, EBITDA for the company also increased, surging by 19.7% from $2.58 billion to $3.09 billion. It is also worth noting that management used some of the strong cash flow the company generated to pay down debt. Overall net debt for the quarter came in at $47.75 billion. That’s down $614 million from what the company had at the end of the second quarter this year.
Strong results for the third quarter were also instrumental in aiding results for the first nine months of the year as a whole. Revenue of $69.38 billion dwarfed the $48.76 billion reported the same time one year earlier. But when it comes to profits and cash flows, the picture looks rather disappointing at first glance. Operating cash flow, however, fell year-over-year, declining from $9.42 billion last year to $7.71 billion this year, while the adjusted figure for this fell from $8.45 billion to $7.93 billion. DCF dropped from $6.62 billion to $5.54 billion. Meanwhile, EBITDA for the company also worsened, falling from $10.24 billion to $9.66 billion. This pane on the bottom line, however, was actually due to really impressive results from the 2021 fiscal year that were driven by inclement weather that the company benefited from. That particular event impacted the company in a favorable way by at least $1.1 billion. Excluding that impact, the results this year would be better than they were last year in many respects.
What has really helped Energy Transfer has been strength when it comes to key areas of the business. For instance, under the Intrastate Transportation and Storage segment of the company, the amount of natural gas transported jumped by 28.2% in the third quarter compared to the same time last year. Higher volumes, combined with other factors such as the impact of its acquisition of Enable Midstream, helped to push up segment margin for the company by 62.8%. Under the Interstate Transportation and Storage segment, meanwhile, the amount of natural gas transported grew by 42.8%, while segment margin increased 30.6%. The Midstream segment experienced a 47.1% rise in gathered volumes and a 22% increase in NGLs produced, helping to push segment margin for the company up by 55.7%. Though less relevant, we also saw improvements in the company’s other segments as well.
Due to strength across the board, management has increased guidance for the 2022 fiscal year as a whole. At present, they are forecasting EBITDA of between $12.8 billion and $13 billion. The prior expected range was for between $12.6 billion and $12.8 billion. Following the same methodology, I have in the past, I was able to arrive at estimates for other profitability metrics. For instance, operating cash flow should be around $9.56 billion for the year after stripping out preferred distributions and non-controlling interests. If we only take out capital expenditures that are dedicated to maintenance spending, we would then get modified free cash flow for the company of $8.88 billion. I call this the ‘true free cash flow’ of the business. My approach also gives us a DCF of $8.46 billion.
Given these numbers, I calculated that the company is trading at a forward price to adjusted operating cash flow multiple of 4. The price to true free cash flow comes out to 4.4. The price to DCF multiple is slightly higher at 4.6, while the EV to EBITDA multiple should come in at 7.8. As part of my analysis, I also compared Energy Transfer to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 7 to a high of 9.8. And when it comes to the EV to EBITDA approach, the range was between 9.9 and 391.2.
|Company||Price / Operating Cash Flow||
EV / EBITDA
|The Williams Companies (WMB)||9.8||13.0|
|Kinder Morgan (RMI)||8.5||12.0|
|Cheniere Energy (LNG)||7.3||391.2|
|TC Energy (TRP)||8.0||12.3|
To see what kind of upside might exist for investors in Energy Transfer, I decided to look at a couple of different scenarios. For both the price to operating cash flow approach and the EV to EBITDA approach, I calculated what the company’s upside would be if it were to trade at the average of those multiples. Obviously, for the EV to EBITDA method, I took out the extreme outlier. And then I also asked myself the same question but instead calculated it for a scenario where Energy Transfer is supposed to trade at a level that is even with the lowest priced of the five companies. As you can see in the table below, upside for the company is tremendous, ranging from a low point of 68.6% to a high point of 157%. Never mind the distributions that investors can lock in today, with an effective yield of 8.3%.
Based on all the data provided, I remain incredibly happy with my decision to purchase stock in Energy Transfer. It’s a remarkable company that generates significant cash flows. In addition to this, management keeps increasing guidance thanks to strong fundamental performance. And it also helps that while the stock is cheap on an absolute basis, it is also cheap relative to similar players. For all of these reasons, I happily keep my ‘strong buy’ on it for now.