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Bullish on Energy Transfer Partners LP? You'll Love These Stocks

By Matthew DiLallo - Oct 11, 2017 at 11:10AM

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These MLPs offer a similarly appealing high yield, with a bit less risk.

Investors have good reason to be bullish on Energy Transfer Partners (NYSE: ETP) since several catalysts could send this beaten-down master limited partnership soaring. That said, there are just as many reasons why investors should be cautious, including the massive cost of the incentive distribution rights (IDRs) owed to its parent company, Energy Transfer Equity (ET 0.40%), and its weak balance sheet, which could continue to weigh on units. That's why those who are bullish on Energy Transfer Partners should take a closer look at Summit Midstream Partners (SMLP -5.58%) and Plains All American Pipeline Partners (PAA 2.85%). Investors will likely love what they see since both offer similar potential but with less risk.

An ultra-high yield that doesn't need to be propped up by the parent

One of the draws of Energy Transfer Partners is its eye-popping 11.8% yield. The company can currently cover its payout, but that's because it's getting some support from Energy Transfer Equity, which agreed to waive a portion of the costly IDRs it's owed for the next few years. As a result, this payout isn't as safe as it seems since Energy Transfer wouldn't have fully covered it last quarter without that support. That's why yield lovers should take a closer look at Summit Midstream Partners and its equally attractive 10.8% yield.

A closeup of valves on a pipeline.

Image source: Getty Images.

One of the things that stand out about Summit is that the company can cover its payout without any IDR support from its parent since its coverage ratio was 1.11 times last quarter and should range between 1.1 to 1.2 times this year. In the meantime, the company has a solid leverage ratio of 4.35 times, with plans to get it between 3.5 to 4.0 times over the long term. For perspective, Energy Transfer is working to reduce its leverage from around 5.0 times to about 4.0 times in the next year. 

If there's any concern with Summit, it's that it does owe its parent a deferred payment to complete a dropdown transaction from last year. However, it has until 2020 to raise the cash, which could include issuing equity directly to its parent to satisfy the deferred payment.

Meanwhile, because of its healthy distribution coverage and in-process growth projects, Summit expects to start growing shareholder distributions in the near future. Overall, the company believes it can increase its payout by a 3.2% annualized rate through 2019, which is above its projected peer average of just 2.3% growth. While that's less than the low double-digit growth rate Energy Transfer expects to deliver in the near term, there's a higher risk the company will eventually cut its payout due to the exorbitant IDRs it will continue to pay Energy Transfer Equity. That threat of a payout cut is why investors should consider Summit instead. 

A natural gas processing plant.

Image source: Getty Images.

Ripping off the Band-Aid to heal quicker

Plains All American Pipeline got itself into a tight financial spot similar to Energy Transfer due in part to the IDRs owed to its parent, Plains GP Holdings (NYSE: PAGP). One of the steps the companies undertook to fix the problem was to complete a transaction that eliminated those payments in exchange for more units, which coincided with a small distribution cut by both partnerships. However, Plains still had some legacy debt issues to address, which is why it took things even further this summer by slashing its payout to shore up its financial situation. The company plans to use the cash it would have paid investors and reduce debt so it can reach its targeted leverage metrics in early 2019.

Once it reaches that target, Plains plans to deliver sustainable multiyear distribution growth. One of the drivers of that growth is the company's current slate of expansion projects, which should boost adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 14% to 24% next year and between 33% to 43% in the coming years. Consequently, Plains could give investors one big distribution boost in 2019 by resetting it closer to the former level while also paving the way for steady increases in subsequent years.

These are the sorts of moves that Energy Transfer Partners might eventually need to make to compete with stronger rivals. As things stand right now, though, the company doesn't plan to do anything until the end of 2019. So, investors will be in limbo for quite a while. Plains' investors, on the other hand, only need to wait six months before its plan should start paying dividends. 

Similar reward without as much risk

Energy Transfer Partners is hoping to grow its way out of its tight financial situation by completing a slew of growth projects. While that plan could work, there's an elevated level of risk that it won't. That's why investors who like what Energy Transfer has to offer should take a look at Summit and Plains because they provide the income and growth potential of Energy Transfer, without as much risk.

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Stocks Mentioned

Plains All American Pipeline, L.P. Stock Quote
Plains All American Pipeline, L.P.
$10.10 (2.85%) $0.28
Energy Transfer LP Stock Quote
Energy Transfer LP
$10.02 (0.40%) $0.04
Summit Midstream Partners, LP Stock Quote
Summit Midstream Partners, LP
$12.02 (-5.58%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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