Rida Morwa | Feb 10, 2016 10:02AM ET
Summary
Energy Transfer Equity (ETE) was massacred last Monday, going down by 41%. There are several reasons given, none of which makes much sense given the steep decline:
It seems that nervous investors are shooting before asking questions. Let us have a look at some facts:
The price decline in ETE seemes to have been fueled by nervous investors overreacting due to the current high volatility and the steep declines in the US and global markets (S&P down by 3% the past week). Fear of further declines in crude prices (N:USO) could be at play, which is still a possible scenario in the short term.
ETE Trades at Bargain
Taking aside the current headwinds -- resulting from lower oil prices -- we cannot deny that the stock of Energy Transfer Equity trades today at a bargain valuation, with a price of $4.30 per unit, a stunningly low forward PE of 2.7 and a projected dividend yield of 28%. The Company remains a solid one generating a 38% operating Earnings yield, and is not even facing a major distribution cut. ETE owns the general partner and the incentive distribution rights of Energy Transfer Partners (N:ETP), which is considered to be a cash cow.
The Future of MLPs remains closely tied to Oil Prices
Ultimately, one should look at the fundamentals driving revenues and distributions of MLPs, being the price of oil and volumes transported, both of which closely tied to the price of crude oil (OIL).
Bottom line: Oil supply and demand are expected to reach a balance by the end of 2016, and crude inventories to face declines in 2017 as per the Chart below posted by the Energy Information and administration (EIA) in its January 2016 report:
If we add to the above crude price at $50 per barrel a year from today (price consensus by both major banks and the EIA), the outlook is pretty good for the Midstream companies in the medium and long term.
At $50 a barrel, midstream companies will get a huge bump in their revenues, while North American drillers will be able to stay afloat until new drilling is required to meet expanding demand -- expected to happen in 2017.
As for ETE, its current bargain price is unlikely to last for long. Its price was up 13% on Tuesday. Other MLPs prices that went down this week in sympathy and worth having a look at include: Spectra Energy (N:SEP), Enbridge (N:ENB), and Oneok Partners (N:OKS).
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