This post is another stock to study for those who have been following from the beginning, and understand that when bottom fishing, every story is different and some will give you outsized gains, some will lag for a long time, and some may go down in value.
Watch this free Webinar video for an intermarket, market psychology introduction and last week's market outlook. It may help you appreciate this post better.
Note that there is broad market risk, meaning that if the broad markets sell off, there may be headwinds on price. But for those who have a 1 year horizon, unless we have a financial crisis, I believe there is good value here.
However, if you are looking longer term and want something of deep value but high variance in target price. Here's something to consider.
The Mar-Apr looks like a bottom, for now. The consolidation in the last 1 week is more bullish than bearish.
The bottom in Mar and Apr has been the insider buying zone. They have been buying from $4.26 to $7.57. The price now is inside the zone.
This is a midstream, fee-based, energy service provider. Not wanting to reinvent the wheel, here's a good write up. Please read the post by Brad Thomas, it's worth your while.
I'll parse out my thoughts with some of Brad Thomas's points in the above write up. :
1. Oil crash leading to very bearish long term growth outlook - but has the price overcompensated for this reduction in growth? Seems to me.
2. The income risk is customers going broke and defaulting on those long-term contracts:
(Source: Investor Presentation)
71% of its cash flow are from 20 large oil companies, and just 19% is from junk bond rating companies. And of those in the 19%, their exposure to high-risk producers like CHK (likely going bankrupt) is 1% of less. Assuming the oil majors will honor their contracts, that doesn't seem that bad.
3. ET drives 75% of cash flow from natural gas and NGLs, meaning it has less oil exposure.
4. ET has no debt maturities until a modest $1.4 billion coming due in 2021, by that time, the pandemic is expected to be over and credit markets looser.
5. They did not cut their annualized ~20% this quarter. Although they might reduce it later this year. They might reduce their dividend next quarter, but even if they cut it by 50%, it's still a double digit dividend that will attract some people in the market.
Risk-Reward (that the "Average Investor" is starting to see)
Morgan Stanley gives a wide variance for the risk reward in a year's time. This is expected in a medium risk, high reward bottoming play. This also shows you what the "average investor" is looking at. I'm not so optimistic at $16, but even if it makes $11 in 2 year, I'll take that.
Note that for foreign investors buying a US MLP, there are tax considerations. On the dividend income, tax could be as high as 40%. https://www.alerian.com/why-foreign-ownership-in-mlps-is-up-300-over-the-last-10-years/
However, many people will be buying this for capital gains. And, a 40% tax on a 20% dividend is still more than 10%.
1. Prolonged oil prices will hurt the stock in 2 ways: by sentiment (oh no, the oil sector is collapsing), and by fundamentals (time will tell how cash flow will be reduced by collapsing companies, but 70% of it's contracted cashflows are by oil majors)
2. However, an improvement in oil sentiment will also provide tailwinds to the stock price. This is an indirect way of playing the survival of the oil sector, and oil price.
3. There is a risk that if the COVID19 lasts longer than expected, and oil prices cannot recover, that there is more damage to the oil sector and ET will take collaterial damage.
4. But at these historically low prices, the reward seems more than risk. Insiders seem to think so too.
5. A way to play this is to have a longer term view, and to size your bet on this stock small enough so that you aren't knocked out if it goes against you. When playing bottoming stocks, once you've done your due dilligence and you reckon the company is worth more and can survive, AND you bought it at prices that insiders bought, you shouldn't be trading in and out of it unless you already made a sizable gain. If you sell the moment it drops 10%, it means you aren't confident in the stock fundamentals or you bought too much. Hence, you need to study the company more, or size your investment to a smaller amount.
6. If price breaks out of its consolidation, the technical targets are just under $8, and $11. There likely needs to have better-than-expected sentiment on the oil sector to get through those levels. If you buy this stock, you are betting that the insiders believe this, and are correct.
A barbell shaped investment portfolio is a good strategy for these times for the longer term investor.
This means that you buy some stocks that are safe and will do relatively well if we stay in the COVID regime (but won't get outsized gains), but also a couple stocks that will increase dramatically should there be a recovery.
I consider companies like MSFT, DELL as the safer growth companies. The world needs tech (or even more tech) even when more people have to work from home.
Utilities is a less risky play as well (VST), because people still need electricity.
ET is a high risk, but even higher reward stock, but I think the stock price is worth a shot, but don't bet the house.
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