Can This 6.3% Yield Survive if Oil Crashes Again?
An energy sector MLP, Energy Transfer (NYSE:ET), offers a distribution yield of 6.3% but faces uncertainty if oil prices drop again. Its distribution cut in 2020 during the coronavirus pandemic was a strategic move to strengthen its balance sheet, which now shows a lower debt-to-EBITDA ratio of 4.1x compared to its competitor's 3.3x.
Energy Transfer aims for 3%-5% annual distribution growth, similar to Enterprise Products Partners (NYSE:EPD) yield of 5.7%, which has a more consistent track record of annual increases. Energy Transfer's current distributable cash flow covers its distribution by 2.2x, while Enterprise's is covered by 1.9x, indicating both have room to absorb adversity.
However, Energy Transfer's complexity, with two other publicly traded MLPs under its control and a more aggressive business model, may make it a riskier choice for conservative investors. Despite the added risk, if you can handle uncertainty, Energy Transfer could survive the next energy downturn, given its recent improvements.
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