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Why Energy Transfer Rallied 11% in January

By Matthew DiLallo – Updated Apr 17, 2019 at 12:38PM

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The midstream giant enjoyed a bounce-back month.

What happened

Energy Transfer (ET -0.90%) endured a volatile year in 2018 as the midstream giant's unit price surged and stalled a few times before tumbling along with oil prices to end the year down more than 23%. Crude prices, however, have snapped back to start 2019. That rebound was one of several catalysts that helped get the MLP off to a great start in 2019, with it rallying 11.4% in January, according to data provided by S&P Global Market Intelligence.

So what

Oil prices rebounded 18% in January as they started clawing their way back from a 40% plunge over the final three months of 2018. The main factor driving crude's rally was that oil inventory levels -- which climbed during the fourth quarter -- started falling as production cuts from an OPEC-led coalition began having an impact.

Pipelines on green grass and headed towards a blue sky.

Image source: Getty Images.

Those higher prices benefit Energy Transfer in two ways. First, the company has some direct exposure to commodity prices as margin-related activities supply about 14% of its earnings. While this hurts cash flow when oil and gas prices fall, it provides a boost when they rebound. Second, the improvement in crude prices increases the confidence of oil companies, which makes them more likely to sign on to new infrastructure projects that Energy Transfer has in development.

In addition to the boost from higher oil prices, Energy Transfer also benefited from several other factors last month. The company started service on its 350-mile Mariner East 2 natural gas liquids pipeline, which will provide a much-needed solution to producers in the Marcellus and Utica shale while generating a steady stream of cash flow for Energy Transfer. And the company was able to leverage its improved balance sheet to issue $4 billion of senior notes, which it used to refinance higher-cost bonds as well as fully repay a term loan. This move will reduce its interest expenses while further shoring up its balance sheet so that it can continue funding expansion projects.

Now what

Despite last month's rebound, Energy Transfer still looks like an attractive opportunity for investors. Not only does it offer an increasingly sustainable 8.1%-yielding distribution, but the company is also on track to deliver record earnings this year thanks to recently completed expansions like Mariner East 2. That combination of growth and income could enable Energy Transfer to generate market-beating returns in 2019 if oil prices stabilize.

Check out all our earnings call transcripts.  

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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