Key Points
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Energy Transfer operates in the midstream sector, using a largely fee-based model.
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The master limited partnership has a lofty 7.4% distribution yield.
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There are lower-yielding midstream companies that I prefer over Energy Transfer.
I recognize that there are good reasons for investors to buy Energy Transfer (NYSE: ET) today. I can even appreciate that the master limited partnership (MLP) has taken important steps to strengthen its business in ways that should appease the concerns I have about the investment. Yet, I still think alternatives like Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB) are better. Here’s my honest opinion of why Energy Transfer isn’t the best option in the midstream space.
What does Energy Transfer do?
Energy Transfer helps to move oil and natural gas around the world. It owns a collection of energy infrastructure assets, like pipelines, that generate reliable fee-based income. Without the assets Energy Transfer owns, producers wouldn’t be able to get their oil and natural gas to processors and refiners, or the end consumer.
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From this perspective, Energy Transfer’s core business is pretty similar to that of fellow MLP Enterprise Products Partners and Canadian midstream giant Enbridge. But Energy Transfer’s distribution yield is 7.4%, versus a yield of 7% for Enterprise and dividend yield of 6% for Enbridge. The yield difference here matters.
You are taking a higher risk with Energy Transfer
For starters, Energy Transfer is, in some ways, a much more complicated business than Enterprise or Enbridge. They all own a host of assets, but Energy Transfer is also the general partner for two other publicly traded MLPs. That’s not the biggest part of its business, but it makes things a bit more difficult to track. This alone wouldn’t be enough to stop me from buying Energy Transfer, but it does give Enterprise and Enbridge, which are simpler businesses to understand, an edge in my book.
The big problem comes down to trust. Enterprise has increased its distribution annually for 26 consecutive years. Enbridge’s dividend has grown for three decades. Energy Transfer cut its dividend in 2020, right when most income investors would have likely wanted dividend consistency given the pandemic and bear market at the time. If this were the only issue, since the dividend is back on the growth path and above where it was before the cut, I might be able to overlook it. But there’s more.
In 2016, Energy Transfer agreed to buy Williams Companies (NYSE: WMB). But an energy downturn at the time led to management getting cold feet. It scuttled the deal, which might have required taking on a huge amount of debt, a dividend cut, or both. This was probably the right move, but it issued convertible securities as part of the process of killing the deal. The CEO at the time bought a material amount of the convertibles, which appeared as though it would have protected him from a dividend cut if one were needed.
Even years later, I still can’t help but wonder if insiders get favored more than investors at Energy Transfer. There’s no similar event at Enterprise or Enbridge and, thus, I trust these two midstream competitors more.
Add it all up, and I can’t justify buying Energy Transfer
Yes, Energy Transfer has a slightly higher yield than Enterprise and Enbridge. But the added risk I’d be taking on, notably on the trust side of the equation, isn’t justifiable in my book. I’m happier with lower yields and more trust. After all, it’s not like Enterprise or Enbridge have low yields. They’re just lower than Energy Transfer’s yield, which makes sense when you consider the risks here.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.