Why Energy Transfer Can’t Get Respect

If Energy Transfer (ET) was a private company contemplating an IPO, the 15% Distributable Cash Flow (DCF) yield indicated by their underwriters would draw laughter. The bankers would be ushered out of the conference room.

Yet that is the lowly valuation investors assign to perhaps the least loved pipeline company in a sector that investors find lukewarm at best. ET is priced far below where they’d take the company public, if it wasn’t already a listed company. CEO Kelcy Warren and his team continue to execute and beat expectations on earnings. Last August Kelcy joked that, “A monkey could make money in this business right now.” (see Running Pipelines is Easy). Inviting critics to find fault, they nonetheless still deliver good results. Unlike most MLPs, ET (legacy Energy Transfer Equity) has never cut its distribution.

The market prefers style over substance, for on the soft issues of PR and Investor Relations (IR), ET’s record is sharply at odds with their financial performance. From their ill-fated pursuit of Williams Companies (WMB), the dubious dilution of shareholders with management-only convertible preferreds (see Will Energy Transfer Act with Integrity?) and the optically poor dispute over the Dakota Access Pipeline, this is a company that cares little about its image. Pennsylvania’s huge natural gas boom has been helped by a generally pro-energy regulatory regime, but ET has even managed to make enemies there.

ET’s PR staff must get combat pay.

Warren Buffett recently explained how Berkshire’s (BRK-A) $10BN investment in Occidental (OXY) was negotiated with no contingencies (save that they acquire Anadarko). Buffett needs to trust his investment partners. On this basis, ET is an implausible candidate for a BRK investment.

On the 1Q19 earnings call, Kelcy commented on how he is listening to the market. He’s been, “…trying to understand what the market would like to see us to do. What causes our unit price to perform better, in other words.”

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Disclosure: We are invested in BRK, ET, PAGP, and WMB.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund. To learn more about the Fund, please click more

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