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Why Units of Energy Transfer Slumped 12% in February

By Matthew DiLallo - Updated Mar 4, 2020 at 8:50AM

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Several factors weighed on the midstream MLP last month.

What happened

Units of MLP Energy Transfer (ET -1.40%) fell 12% in February, according to data provided by S&P Global Market Intelligence. Weighing on the midstream company was its weak outlook for 2020 and slumping oil prices. 

So what

Energy Transfer reported its fourth-quarter and full-year results last month. It ended the year on a high note as its earnings came in ahead of its already upwardly revised outlook. Overall, the energy company generated $11.2 billion of adjusted EBITDA last year, up 18% from 2018's level and above its $11 billion to $11.1 billion guidance range. As a result, it produced enough cash to cover its high-yielding payout by a very comfortable 1.96 times. 

A natural gas well with pipelines at sunset.

Image source: Getty Images.

While Energy Transfer's EBITDA soared last year, it unveiled a muted outlook for 2020, forecasting an EBITDA range of $11 billion to $11.4 billion. That lack of growth comes even though the company closed its acquisition of SemGroup at the end of last year and invested $4.3 billion on expansion projects. Offsetting those positives will be expiring legacy contracts and the impact lower commodity prices will have on its market-sensitive businesses. 

Crude oil prices have continued to weaken as they plunged at the end of last month due to concerns about how much the COVID-19 outbreak will impact demand. If global oil consumption falls, drillers in the U.S. could cut spending, causing their output to decline. That could result in fewer barrels flowing through Energy Transfer's midstream systems, which would impact its earnings. 

Now what

Energy Transfer is going up against some headwinds in 2020 that could cause its growth engine to slow. However, the company is still on track to generate significantly more cash than needed to cover its distribution, which now yields 10.6% after last month's sell-off. That will give it the money to fund the bulk of its expansion program, strengthening its balance sheet. Because of that, it's an intriguing stock for dividend investors to consider these days.

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