Barclays Reinstates Coverage On Energy Transfer Equity At Overweight

Barclays has reinstated coverage of Energy Transfer Equity LP (NYSE: ETE) with an Overweight rating and $20 price target, saying that it offers attractive valuation while offering distribution growth CAGR of 14 percent from 2015–2020.

The brokerage said units of Energy Transfer Equity are trading at a discount due to leverage concerns and residual litigation overhang post-merger termination with Williams Companies Inc (NYSE: WMB).

"Our view is that the leverage issue is manageable given the substantial coverage ETE has today (1.45x in Q1) as well as cash retention of $520–$845 million through the series A preferred deal," analyst Heejung (Helen) Ryoo wrote in a note.

The analyst expects ETE's consolidated leverage to reduce by on average of 0.44x per year reaching 4.6x by 2018 versus close to 6x in 2015.

"Given such improvement, we expect negative ratings outlook at Moody's to be restored to stable," Ryoo noted.

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In addition, the analyst leaves distribution flat in 2016/2017, implying substantial de-leverage resulting in improved valuation.

"Once ETP gets out of period of high leverage and light coverage driven by full contribution from $10 billion of projects under execution, ETE will be in a position to resume growth at an average of 22 percent from 2018–2020," Ryoo noted.

Ryoo expects ETE distribution reaching $2.05 in 2020 (80 percent increase from current), which translates into 15 percent yield on current distribution.

At the time of writing, Energy Transfer Equity shares were down 0.58 percent to $13.72.