Morningstar | Energy Transfer Logs Another Impressive Quarter; Units Sharply Undervalued
We are reaffirming our $22 per unit fair value estimate for Energy Transfer after the company reported $2.8 billion of adjusted EBITDA and $1.66 billion of distributable cash flow to partners in the first quarter of 2019. We are reaffirming our no-moat and stable moat trend ratings.All segments reported impressive performance, highlighting the core value of Energy Transfer's assets. The natural gas liquids, refined products, and crude segments have been particularly strong as they take advantage of high production and wide price spreads. The gas pipelines continue to benefit from growing gas demand.
Management's 2019 EBITDA guidance range of $10.6 billion-$10.8 billion is slightly above our forecast. We would consider raising our estimate if liquids markets remain favorable and new projects enter service on schedule.
Management continues to focus on reducing debt to strengthen its investment-grade credit rating. Management announced a new low-end leverage target of 4.0 debt/EBITDA. If earnings remain strong, Energy Transfer could approach that level by year-end without any further debt reduction.
With the units trading at a 30% discount to our fair value estimate and an 8% yield, we think unit buybacks and distribution increases are the best use of excess capital. The company kept its second-quarter distribution flat at $0.305 per unit, implying a $1.22 per unit full-year distribution. Its $5 billion capital investment plan and deleveraging could slow distribution growth in 2020, but we expect growth to pick up as capital investment slows.
Lake Charles-to-St. James portion of Bayou Bridge pipeline started up on April 1, which should contribute to second-half earnings growth. Assets such as Dakota Access, Permian Express, Nederland, and Marcus Hook offer high-return near-term expansion opportunities. Management likely will make an investment decision in 2020 on its Lake Charles LNG export facility, which could cost some $3 billion.
Energy Transfer is a holding company. Through its subsidiaries, the company is engaged in natural gas operations, including natural gas midstream and intrastate transportation and storage and interstate natural gas transportation and storage, and crude oil, natural gas liquid (NGL) and refined products transportation, terminalling services and acquisition and marketing activities. In addition, the company owns investments in other businesses. The company's segments include: intrastate transportation and storage; interstate transportation and storage; midstream; NGL and refined products transportation and services; crude oil transportation and services; investment in Sunoco LP; investment in USAC; and all other.
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