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With the generalisation of vaccines, the decline in contamination, hospitalisation and death rates, and the massive monetary and fiscal stimulus plans enacted almost everywhere, the world economy is bound to grow strongly in the second half of 2021.
The US will recover strongly as well even if at a lower pace than some Asian Nations. After falling by 3.5% in 2020, IHS Markit forecasts that U.S. real GDP will increase by 4.2% in 2021 and 3.8% in 2022.
Economic growth is among the most important drivers of the U.S. Energy consumption.
The U.S. Energy Information Administration’s (EIA) forecasts a slow but still substantial recovery in energy consumption in the US. After falling by 7.8% in 2020, EIA forecasts that total U.S. energy consumption will rise by 2.6% in 2021 and by 2.5% in 2022, reaching 97.3 quadrillion British thermal units (quads), 3.0 quads less than in 2019.
EIA estimates that worldwide global consumption of petroleum and liquid fuels averaged 92.2 million barrels per day (b/d) for all of 2020, down by 9.0 million b/d from 2019. It expects global liquid fuels consumption to grow by 5.6 million b/d in 2021 and 3.3 million b/d in 2022.
It estimates that U.S. crude oil production fell from the 2019 record level of 12.2 million b/d to 11.3 million b/d in 2020 and expects that annual average production will fall to 11.1 million b/d in 2021 before rising back to 11.5 million b/d in 2022.
U.S. liquid fuels consumption in 2020 averaged 18.1 million b/d, down 2.5 million b/d (12%) from 2019 consumption. EIA forecasts U.S. liquid fuels consumption will rise to 19.5 million b/d in 2021 and then to 20.5 million b/d in 2022 (almost equal to the 2019 level).
After their massive downdraft to negative absolute prices in 2020, Oil pries have risen back to above US$50 and are en route to our long stated target of US$ 60, helped by a much more efficient management of supply by OPEC.
Oil prices above $ 45 make most US fracking production profitable adding to potential supply in the US.
But the Biden administration has a clear desire to limit the environmental impact of fracking and the oil industry, as testified by his extremely symbolic cancellation of the construction permit of the Keystone XL pipeline taken on the very day of his inauguration.
In doing so, Joe Biden has settled—almost certainly, once and for all—one of the greatest environmental battles the US has seen. Keystone XL, a project of the TransCanada Corporation (now TC Energy), was slated to carry oil from Alberta’s tar sands across the US to refineries on the Gulf of Mexico. President George W. Bush approved the original Keystone pipeline, and it went into service, early in the Obama years, without any real fuss.The new XL version, announced in 2008, was larger and took a different course across the heartland.
But this adds to our investment case for a smart way to invest in the US energy recovery.
BUY ENERGY TRANSFER LP ET US @ 7.06
ENERGY TRANSFER LP is America’s largest operator of pipelines and energy distribution businesses with more than 90’000 miles of pipelines in operation.
Energy Transfer LP owns and operates a diversified portfolio of energy assets. The Company engages in transportation, storage and terminalling, crude oil, NGLs, refined products, and liquid natural gas. Energy Transfer operates only in the United States.
Energy Transfer LP (ET) transfers natural gas and other energy resources through its massive network of US-based pipelines. The company’s operations occur primarily through primary subsidiary Energy Transfer Operating, LP (ETO) and Sunoco LP, although it has interests in a number of LPs and other subsidiaries.
The company operates pipelines that transport natural gas, natural gas liquids, refined products, crude oil and Liquefied Natural Gas(LNG) across the US. It also owns and operates associated terminalling, storage, and fractionation facilities.
Energy Transfer LP generates about 30% of revenue through a controlling stake in Sunoco LP. In 2019, the company agreed to acquire SemGroup Corporation for $5 billion.
Over the years, this US$ 50 billion company has grown through partnerships and acquisition while increasing its operational efficiency, commercial network and strong finances.
Growth by Acquisition
Energy Transfer Equity was formed in 2002 as La Grange Energy, a Texas limited partnership. In early 2005 it changed its name to Energy Transfer Company.
In August 2005 it converted from a Texas limited partnership to a Delaware limited partnership and became Energy Transfer Equity.
In 2010 Energy Transfer Equity acquired the general partner stake of Regency Energy Partners and sold a 49.9% stake in its Midcontinent Express Pipeline to that company. The move was seen as a way for the company to diversify its general partner operations with the aim of getting a better return for shareholders. Regency Energy Partners focuses on the gathering, processing, marketing, and transportation of natural gas and natural gas liquids in Arkansas, Kansas, Louisiana, and Texas.
In 2012 Energy Transfer Equity bought diversified gas player Southern Union for $9.4 billion (including $3.7 billion in debt). The acquisition made Energy Transfer Equity one of the largest natural gas infrastructure companies in the US.
That year the company also completed a $2 billion merger of a wholly owned Energy Transfer Partners subsidiary with and into Southern Union subsidiary CrossCountry Energy, LLC, which owns an indirect 50% interest in Citrus Corp., the owner of the Florida Gas Transmission pipeline system. After the merger, CrossCountry Energy remained as the surviving entity, a wholly owned subsidiary of Energy Transfer Partners.
In late 2019, Energy Transfer acquired fellow pipeline and energy infrastructure firm SemGroup Corporation in a transaction valued at about $5 billion. Its headquarters is located in Oklahoma, US. The deal enhances Energy Transfer’s midstream infrastructure connectivity, increases the company’s crude oil and natural gas liquids (NGL) infrastructure, and adds direct pipelines to the Houston Ship Channel and the Nederland Terminal. SemGroup Corporation provides gathering, transportation, storage, distribution, marketing and other midstream services primarily to producers, refiners of petroleum products and other market participants located in the Gulf Coast, Midwest and Rocky Mountain regions of the United States of America and Canada.
Energy Transfer’s revenue streams are its crude oil transportation and services; investment in Sunoco LP; the transportation of NGL and refined products; midstream services; interstate transportation and storage; intrastate transportation and storage; and its investment in USAC.
Energy Transfer’s crude oil transportation and services provides transportation, terminaling and acquisition and marketing services to crude oil markets throughout the southwest, Midwest and northeastern US. The company owns and operates more than 10,000miles of trunk and gathering pipelines in the southwest and Midwest in the US. The segment accounts for more than 30% of sales.
Energy Transfer’s investment in Sunoco LP brings in nearly 30% of revenue. Sunoco LP is a fuel distributor to third-party dealers and distributors, fuel traders, and other commercial customers. It also supplies some 5,400 Sunoco-branded or third-party-branded gas stations, all operated by third parties. Sunoco also operates 75 retail stores in Hawaii and New Jersey.
The NGL (natural gas liquids) and Refined Products Transportation and Services segment represents around a fifth of sales. It owns some 4,500 miles of NGL pipelines, fractionation facilities; a NGL storage facility in Mont Belvieu; and other NGL storage assets.
Energy Transfer’s Midstream Segment generates 10% of annual sales. It owns natural gas gathering, compression, treating, processing, storage, and transportation assets.
The Interstate Transportation and Storage segment connects natural gas suppliers with industrial end users and other pipelines via storage facilities and gathering systems. It owns and operates approximately 12,500 miles of interstate natural gas pipelines and another approximately 6,770 miles through joint venture interests. The segment accounts for almost 20% of sales.
The Intrastate Transportation and Storage segment has similar operations to the above, contained within Texas. It owns and operates 9,400 miles of pipeline and three natural gas storage facilities. The segment accounts for about 10% of sales.
USAC provides compression services. This segment generates the remainder of the company’s revenue.
Based in Dallas, TX, Energy Transfer operates entirely within the US. It has significant operations in Texas, Louisiana, Oklahoma, West Virginia, Pennsylvania, and New York. Its pipelines reach as far as North Dakota, Arizona, and Idaho.
The Sunoco LP subsidiary is headquartered in Philadelphia, PA.
Energy Transfer’s customers include petrochemical companies, commercial and industrial end-users, oil and gas producers, municipalities, gas and electric utilities, midstream companies, and independent power generators.
Sunoco supplies approximately 5,474 gas stations, some Sunoco-brands and some under third-party brands, such as Chevron, Exon, and Valero. Sunoco is Chevron’s largest fuel supplier.
Energy Transfer’s strategy is to engage in a well-balanced plan for growth through strategic acquisitions, internally generated expansion, measures aimed at increasing the profitability of existing assets and executing cost control measures where appropriate to manage operations.
The company operates as a diversified, growth-oriented limited partnership.
The company balance its desire for growth with goal of preserving a strong balance sheet, ample liquidity and investment grade credit metrics.
Following is a summary of the business strategies of its core businesses:
Growth through acquisitions. Energy Transfer intends to continue to make strategic acquisitions that offer the opportunity for operational efficiencies and the potential for increased utilization and expansion of existing assets while supporting investment grade credit ratings.
Engage in construction and expansion opportunities. The company intends to leverage existing infrastructure and customer relationships by constructing and expanding systems to meet new or increased demand for midstream and transportation services.
Increase cash flow from fee-based businesses. Energy Transfer intends to increase the percentage of business conducted with third parties under fee-based arrangements in order to provide for stable, consistent cash flows over long contract periods while reducing exposure to changes in commodity prices.
Enhance profitability of existing assets. The company intends to increase the profitability of existing asset base by adding new volumes under long-term producer commitments, undertaking additional initiatives to enhance utilization and reducing costs by improving operations.
In a nutshell, Energy Transfer is an extremely well managed company that has built a leading franchise in energy distribution in the US with a balanced portfolio of assets and businesses and strong financials.
Like all businesses, it has been affected by COVID in 2020 but is expected to recover strongly in 2020 and 2021 , particularly at the net profits level.
Its LP structure makes it naturally biased to distribute earnings and dividends, and it 8.64 % dividend yield is extremely attractive considering its stable cash flow and strong financial position.
After a 26 % decline in revenues and 87 % decline in Earnings per share in 2020, the company is expected to go back to 46 Billion of revenues and 3.3 Billion of profits in 2021, its second best operating performance.
Earnings per share are expected to climb back to 1.14 $ in 2021.
Dividends were cut in 2020, but still yielding 8.64 % while the past 12 month yield was at 12.96 %. With the strong recovery in profits expected in 2021, the dividend should be brought back uo to the 2018 and 2019 levels, meaning a potential doubling of the dividend yield next year.
Analysts are gradually raising their ratings and target prices on the company, with Morning Star, then 1 ranked analyst having a target price at 20.
ET has been in a bear market since 2015 in line with the bear market in oil prices and as it was digesting acquisitions and debt-reduction. March 2020 saw a major double bottom and since then the stocks price has been in consolidation mode.
The Moving averages are now turning up with the 50 DMA crossing the 200 DMA upwards, delivering a Golden Cross.
A succession of higher lows and higher highs is now confirming that selling pressure is being exhausted and that the stock is ready to start a new secular bull market.
We see the current levels as a unique opportunity to gain exposure to the US energy sector and economic recovery.
We are adding the stock to our Model Portfolio
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