Energy Transfer Partners L.P. Looks Interesting
Energy Transfer Partners L.P. (ETP), which is the third-largest master limited partnership in the U.S., owns 16,000 miles of pipeline and produces, stores and transports natural gas throughout Texas and neighboring states, has seen its unit price fall in conjunction with the recent sell-off in various commodities. While we at Ockham also believed that many commodities markets were a speculative bubble waiting to burst, one cannot deny that domestic demand for natural gas in the future looks as strong as it ever has. In fact, it would appear that domestically-produced natural gas offers one of a number of options for reducing our dependence on foreign oil supplies in the future. As such, we view the pull-back in ETP units as a good entry point for investors who have some risk tolerance and a need for income.
Having traded as high as $63.04 a year ago this past July, ETP is off more than thirty percent. As a master limited partnership, ETP passes the annual income, gains, losses, deductions and credits of the partnership on to each individual unit holder. Unlike common stocks which distribute an IRS Form 1099 to share holders each year, master limited partnerships report the taxable income of unit holders via the Form K-1. Based on its current quarterly distribution rate, ETP units yield about 8.3%.
ETP and similar entities emerged out of the rubble of Enron and began cobbling together a portfolio of pipelines, processing plants and storage facilities in Texas in the early part of this decade. ETP now owns the largest intrastate natural gas network in the U.S. About half of the firm’s annual profits come from services related to this growing distribution network, while the other half comes from sources subject to the vagaries of the natural gas market. Given the likelihood that demand for natural gas will only increase in coming years, it is likely that ETP will benefit from its strong position in the marketplace for the foreseeable future.
From a valuation standpoint, ETP units appear attractively valued at the present time. Based on the partnership’s historic Price-to-Cash Earnings range (6.57x – 9.86x) the current multiple of 5.97x looks good. Looking at the historic Price-to-Sales range (.6x - .9x), the current number of .59x is over twenty percent below the average of said range.
In an increasingly despondent stock market, being able to find an investment which is both compellingly valued and has a generous and reasonably stable (as compared to financial companies, which are slashing dividends left and right) yield, is a good thing. ETP units look intriguing to Ockham Research at the present time. Furthermore, future changes in the tax code could make the relative appeal of these units even more interesting.
Ockham Research Staff @ August 20, 2008