Energy Transfer: First Shareholder Communication Shows Insider Buying And No Dividend Cut
Mar. 25, 2020
Summary
Energy Transfer has released its investor presentation, its first shareholder communication since the oil crash.
This investor presentation shows strong insider buying and a willingness to cut capital before debt.
Energy Transfer is continuing to earn significant cash, and the company has continued their 2020 guidance in this presentation.
This past week, Energy Transfer (NYSE: ET) shared its most recent investor presentation. The first communication from management since the oil price collapse started in early-March, this communication is incredibly important for investors. As we'll see throughout this article, the latest data, supported by insider buying, indicates the company has strong potential and an affordable dividend.
Energy Transfer Overview
Energy Transfer has an impressive portfolio of assets worth paying close attention to. The company's business has continued to execute well.
Energy Transfer Overview - Energy Transfer Investor Presentation
Energy Transfer has ~90 thousand miles of pipelines, moving ~30% of the U.S. natural gas and crude oil. The company is diversified geographically, however, it's worth noting that the vast majority of the company's operations are in the United States. However, what's worth distinguishing here is that the company has access to virtually every supply basin and export markets.
This is important because there are significant aspects of the U.S. domestic fossil fuel markets not affected by the recent oil crash. Basins that are heavy natural gas producers, or export infrastructure tied to power generation (whether that's power plants in the US or LNG exportation abroad) can survive independent of oil production. More importantly, electric power consumption continues even through COVID-19.
Financially, we'll discuss this in more detail, but Energy Transfer has a strong financial picture. While recent market price declines have pushed the company's market capitalization to less than $13 billion with more than $50 billion in debt, the company earned a record $11.2 billion in adjusted EBITDA in 2019 and expects that to continue in 2020. Also, the company has a 1.96x dividend coverage ratio - one of the highest among peers.
Energy Transfer Financial Strength
Looking more deeply into the company's financial strength, we can look into its 2020 forecast earnings along with the strength of its fee-based income.
Energy Transfer Adjusted EBITDA - Energy Transfer Investor Presentation
Energy Transfer expects 2020E adjusted EBITDA to be, at the midpoint, the same as 2019. It's important to note here that this guidance was issued this past week, after the company has started to collect data from the effects of the oil price crash and COVID-19. The primary reason for this is the company's strong fee-based capital, roughly 85-90% of its adjusted EBITDA, not subject to price fluctuations.
At the same time, while the company's legacy contracts / renewals could face some difficulty in the current environment, as producers might be reluctant to agree to multi-decade terms, the company has a number of organic projects starting up backed by agreements. Simultaneously, the company is continuing to integrate its SEMG acquisition. Both these things should be drivers of new EBITDA even in a difficult legacy environment.
Looking at the breakdown of the company's 2019 EBITDA by segment and the strength is even more clear. Only 25% of the company's 2019 EBITDA came from crude oil. Out of this, a substantial % was likely contracted to high quality producers with low breakevens in areas of growth, like the Permian Basin. Exxon Mobil (NYSE: XOM), for example, is planning to compete with the Middle East in its Permian Basin operations with mere costs of $15 / barrel.
One other aspect of the company's financial strength worth highlighting is that the company expects 12% of its EBITDA to come from equity stakes the company has in other companies. This EBITDA comes from dividends, but it's worth highlighting two things. The first is the retained earnings of these companies is likely larger, but still benefiting Energy Transfer. The second is that diverse sources of cash flow can allow the company to perform well.
Energy Transfer Growth Capital
No company is more optimistic about itself than Energy Transfer.
Energy Transfer Growth Capital - Energy Transfer Investor Presentation
Energy Transfer originally planned to spend $4 billion in 2020E growth capital. However, one key aspect of the guidance is the company has announced the ability to cut this by $500 million - delaying this to 2021 / 2022. Given the company has $1.8 billion in backlog approved projects for 2021E+ and it's expecting a $2-2.5 billion annual run-rate, it has significant room here to push off capital spending.
However,it's worth noting the company's annual DCF is a staggering $6.4 billion of which dividends are ~$3.3 billion here. That means that after 2020, despite continued annual capital spending at nearly 20% of its market capitalization, the company will become FCF positive. That leftover FCF, should the company choose to do so, could be used to rapidly pay down debt, improving the company's overall financial position.
Energy Transfer Senior Debt - Energy Transfer investor Presentation
One other important aspect of the company's financial position is that while the company has a significant amount of overall debt, its near-term maturities are very manageable. The company managed to raise 30-year bonds at 5% in Jan. 2020 highlighting its financial strength and the trust bankers have in the company with $6.1 billion total senior notes and preferred units raised.
At the same time, the company only has $4.45 billion in debt maturing in 2021-2022. For reference, in 2021 and 2022, based on capital spending on the lower end of the run-rate (i.e. assuming the company finds new projects) the company will have $4 billion in capital spending, $13 billion in DCF, and $6.5 billion in dividends. That leaves $2.5 billion enough to cover more than half of this debt.
That doesn't count the fact that companies often roll over short-term debt, highlighted by the company being able to raise more than $6 billion in early-2020.
Energy Transfer Insider Purchases
Energy Transfer's managers and senior leaders are a strong fan of the company's potential.
Energy Transfer Insider Purchases - Energy Transfer Investor Presentation
In the last 6 months, as markets have panicked, insiders and independent board members have purchased ~0.5% of the company for a total of $157 million. A significant portion of this was from the CEO and total ET insider ownership has grown to an impressive 14.5%. This helps to highlight the significant faith management has in the business. With significant inbider ownership, management is equally incentivized not to cut dividends.
I expect, as prices drop further, insider buying will continue. With prices at their early-2016 lows, the opportunities are significant.
Energy Transfer Risks
However, with all of this said, Energy Transfer has 2 significant risks worth paying attention to.
The first risk is the chance of bankruptcy among the company's customers. The company still has significant exposure to the fossil fuel industry, so the chance of bankruptcy is always worth paying attention to. Normally in a bankruptcy, the fee-based contracts don't disappear, but they're instead renegotiated to move towards fair market pricing, or remove unused volumes. Both of these could cause a decrease in income for Energy Transfer.
The second risk is the company's geographic concentration risk in the United States. As a result, the company is heavily susceptible to U.S. action on fossil fuels - especially oil. Calls to go back to a bank on exports of oil and natural gas or calls to limit the industry could have a profound effect on volumes and therefore, eventually, Energy Transfer's income.
Conclusion
Energy Transfer has released its first shareholder communication since the start of the March crash. This guidance is incredibly important because not only does it highlight no dividend cut, as the company's dividend approaches 25%, but it also shows that the company has significant financial room as it looks to defer its large capital spending plans.
More importantly, going forward, Energy Transfer has incredibly strong fee-based capital, with minimal competition or room to break contracts on its assets. The company has significant room to lower capital spending and still pay dividends with a 1.96x dividend coverage ratio and the ability to be FCF positive in the next year. There are some risks, but overall, the company is a quality long-term investment.
