Energy transfer (NYSE: AND) is back below $10 per share, pushing the market capitalization of the company with its 3 billion shares to around $30 billion. The company’s dividend yield is now around 8% and in exchange you get a growing company with a strong portfolio of assets, generating a much higher overall shareholder return. As we’ll see throughout this article, options can help you scale that up.
Energy Transfer Latest Performance
Energy Transfer has continued to execute in its portfolio over the past few months with several new startups.
Energy Transfer Latest Performance – Energy Transfer Investor Presentation
Energy Transfer recently began construction of a new 200 million cubic feet/day natural gas processing plant in the Permian Basin. Companies looking to reduce flaring, now is an opportune time to start, and the plan should be in service by the end of 2022. We expect bolt-on processing plants to continue after that.
The company also began construction of the Gulf Run Pipeline while completing several additions (Ted Collins Link, Cushing South Pipeline Phase II and Mariner East Pipeline). All these new pipelines will allow the company’s EBITDA to increase in the years to come. The company’s forecast for 2022 is approximately $2 billion in capital expenditure (~25% maintenance capital expenditure and ~75% growth capital expenditure) with overall revenue of $12 billion. of dollars.
The company’s continued execution in its business, especially over the past month, is exciting to watch.
Investments in energy transfer
From a more detailed perspective, the company is looking to invest approximately $2 billion in growth capital, which will generate several hundred million dollars of new EBITDA.
Investments in energy transfer – Presentation to investors in energy transfer
Energy Transfer has many activities and, in our opinion, the decline in the proportion of crude oil is actually a good thing. We expect natural gas to be essential to markets longer than crude oil, presenting additional long-term cash flow and growth opportunities. This means that the company’s cash flow could remain reliable or grow for decades.
More and more business growth opportunities are small bolt-on connections. These are assets for which the company takes advantage of mispricing in the markets, allowing high returns at minimal cost. The company is investing heavily in growth capital with many projects and we expect this will increase the company’s ability to generate returns for shareholders.
Management and recovery of energy transfer
Energy Transfer also has some of the most committed executives in the industry.
Energy Transfer Insider Ownership – Introducing Energy Transfer Investors
Energy Transfer has double-digit insider ownership. Insiders and independent board members of the company have purchased more than 20 million units since January 2021 for a total of more than $150 million. This insider ownership gives the company strong incentives to maintain ongoing dividends and other direct returns to shareholders.
Our point of view
At the same time, the company continues to have a lower valuation. The company generates approximately $8 billion in annualized DCF or a DCF return of nearly 30%. From there, the company’s dividend costs $2.4 billion and the growth and maintenance capital brings that figure to about $5 billion for the company. This growth capital is sufficient to increase the DCF by approximately 2-3% per year.
After all that, the company is left with $3 billion. The company quickly reduced its debt to $40 billion. A further reduction would rapidly increase the DCF by reducing interest charges.
If we had a wishlist, we’d like to see the company spend its $8 billion in annual DCF as follows:
– $2.4 billion in dividends (maintaining the existing dividend)
– $0.5 billion maintenance capital (maintain existing infrastructure)
– $0.5 billion growth capital (take only the highest return bolt-on projects)
– $4.0 billion stock buyback (buy all you can as long as the yield is >5%)
– $1.5B Debt Repayment (Highest Yield Debt Redemption Possible)
We expect that with several years of this, buybacks will rapidly drive up the overall share price, while debt repayments and growth capital will increase the DCF. Once the yield hits 5% (~$16/$17 per share), the buyout category can be split between debt repayment and growth capital, accelerating these two sections even further.
However, regardless of how the company spends the money, we expect an overall double-digit return to shareholders.
Options investment strategy
For those looking to invest, we recommend using an options investment strategy with Energy Transfer.
Options Investment Strategy – TD Ameritrade
The chart above shows the current option price for the company. For those looking to invest, we recommend selling cash-backed PUTs at $8/share at a midpoint of around $1.57/share. These options will last for 2 years until they expire for investors. For those selling these cash-secured PUTs, there are two options worth paying attention to.
The first is for the company’s stock price to fall below $8/share. In this situation, you can invest at a cost of around $6.4/share, moving your return from 8% to 15+%. You’ll end up with a great business at a great price. The alternative is for the stock price to stay above $8, giving you a 10% annualized return on your cash for 2 years, a great cash return.
Either way, you get solid returns.
In our view, the greatest risk to our thesis is a long-term decline in oil markets. The transfer of energy depends on volume in the markets, and over the next few decades this volume will continue to decline as the company invests billions to grow. This means that the company’s strong FCF could now steadily decline, which will hurt the company’s ability to generate returns from its assets.
Energy Transfer’s share price remained weak, pushing the company’s dividend towards 8% with a market capitalization of around $30 billion. The company’s debt is close to its targets and the company is currently generating a DCF yield of almost 30%. The company uses a variety of levers to generate overall returns for shareholders.
We would like the company to aggressively focus on share buybacks with debt repayment before investing in growth. While it is important to stay focused on growth, we expect this strategy to establish the business much better in the long term. An options investment strategy could allow for even higher returns, underscoring just how valuable the business is.