Is Energy Transfer Partners a Buffett Stock?

Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Energy Transfer Partners (NYSE: ETP  ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Energy Transfer Partners meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Energy Transfer Partners' earnings and free cash flow history:

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over at least the past five years, Energy Transfer Partners has generated fairly consistent earnings. Free cash flow tended to be negative due to large capital expenditures on expanding its pipeline.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-Year Average)

Energy Transfer Partners

129%

14%

13%

Kinder Morgan Energy Partners (NYSE: KMP  )

157%

18%

19%

Enterprise Products Partners (NYSE: EPD  )

119%

13%

12%

ONEOK Partners (NYSE: OKS  )

118%

18%

20%

Source: Capital IQ, a division of Standard & Poor's.

Energy Transfer Partners tends to generate returns on equity roughly the same as or slightly below those of its peers while employing somewhat less debt.

3. Management
CEO Kelcy Warren has been at the job since 2007. Prior to that, he held other senior jobs at the company, including co-CEO and co-chair. He's also worked for several other energy companies including La Grange , U.S. Propane, and Cornerstone Natural Gas. He helped found Energy Transfer Company in 1996.

4. Business
Oil and gas pipelines aren't particularly susceptible to technological disruption.

The Foolish conclusion
Regardless of whether Buffett would ever buy Energy Transfer Partners, we've learned that while the company produces only moderate returns on equity, it does exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward industry.

If you'd like to stay up-to-speed on the top news and analysis on Energy Transfer Partners or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners and ONEOK Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 08, 2011, at 8:08 PM, prginww wrote:

    ETP (previous name Heritage Propane) has given me 6 to 8% dividend for over 10 years like clockwork.

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