Projects and Acquisitions Push the Model
Energy Transfer is a master limited partnership with a strong platform of crude oil, natural gas and natural gas liquids assets. The company also holds a 70% stake in Lone Star NGL, a 50% indirect interest in the Florida Gas Transmission pipeline, a 40% interest in Holdco and a 32% limited partner interest in Sunoco Logistics Partners. The acquisitive strategy is mostly responsible for the growth seen through the last quarter. However, performance across segments has not been similar.
The midstream and pipelines segment present a great challenge to Energy Transfer’s future performance because transported volumes and processing margins continue to decline. However, this is not enough to offset growth seen in the distribution segment. Looking forward, strategic asset location and continued organic growth is expected to continue delivering profits in the short term. Nevertheless, outlook for the partnership's natural gas gathering and processing business continues to be weak.
An important market share in every major region in the U.S. at which Energy Transfer is present grants a better perspective for the long term. Most growth is expected to come from the greater production of unconventional gas, thanks to the interconnection between assets located in the Haynesville, Fayetteville and Barnett shale especially. Additionally, management took the decision of dropping the propane business to free more capacity for its key natural gas pipeline assets.
Financially, Energy Transfer is moderate due to a rising debt related to acquisitions and declining cash flow due to expensive undergoing projects. Currently trading at 11.4 times its earnings, the stock carries a 65% discount to the industry average. Renaissance Transparency is currently the guru with the largest stake in the firm, and its holding increased during the last quarter. Additionally, Ken Fisher raised his holding by 24% and 34%, respectively. I share their optimism, but remain worried about the state of finances.
Projects and Balance Sheet
Enterprise Products is also a master limited partnership concerned with providing a wide range of midstream energy services to the producers and consumers of natural gas, natural gas liquids and crude oil. The most relevant structural difference with Energy Partners is a greater presence in the offshore side of the business. At the same time, the firm is dominant in natural gas liquids and one of the few master limited partnerships that provides midstream services across the full value chain.
The road ahead for Enterprise Products is very promising thanks to its asset base, liquidity position and ability to carry out transformative projects, resulting in strong cash flow growth despite turbulent markets. Another characteristic that strengthens future outlook is the vertical integration of its midstream operation, giving the firm an important competitive advantage. This is clearly exemplified when mentioning the company´s feeder system stretching from Corpus Christi, Texas, to Norco, La., linking Gulf Coast ethylene plants that account for roughly 90% of U.S. ethane demand.
Organic growth projects, potential acquisitions and solid liquidity position feed prospects for continued growth. In addition, management has raised quarterly dividend payments by 7%, showing the good moment and future prospects enjoyed by the firm. At the same time, capital investments keep on moving forward with $7.5 billion worth of major assets through 2015. So far, two processing trains at its Yoakum natural gas plant, the fifth NGL fractionator at Mont Belvieu, the extension of the Acadian Haynesville and the Seaway crude oil pipeline reversal are the most important projects underway.
The balance sheet for Enterprise Products is strong amid a rising debt. The stock trades at 22.3 times its trailing earnings, and packs a 32% discount to the industry average. Technology Renaissance is also the guru with the largest stake in the firm, and slashed it by half during 2013. Meanwhile, Ken Fisher increased his stake and Mario Gabelli started a new position in the firm. I share their optimism because of the market position achieved and undergoing projects.
Both companies are in good standing today, and are worth a long-term investment. That is why Renaissance Technologies, Ken Fisher and Mario Gabelli made strong bids on both firms. However, I prefer Enterprise Products due to its stronger balance sheet, vertical integration and undergoing projects.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
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