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Energy Transfer Partners Eyes Growth Despite Macro Risks

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We issued an updated research report on pipeline operator Energy Transfer Partners, L.P. (ETP - Free Report) on Oct 3, 2016.  

Energy Transfer Partners is a gathering and processing master limited partnership (“MLP”) with a strategically-positioned asset base that supports its growth objective. The partnership has been consistently returning value to its unitholders through distributions, making it attractive for those looking for a steady source of income. However, the weak energy environment, lack of growth catalysts and high current yield are major headwinds.

The aforesaid factors are reflected in Energy Transfers’ current Zacks Rank #3 (Hold). This implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Over the last few years, Energy Transfer Partners has been making significant investments to improve its midstream, NGL transportation and storage services. In addition, its geographically-diversified asset base lends it a competitive edge.

Moreover, the partnership is expected to benefit from the dropdown of its fuel and retail marketing business to Sunoco L.P. (SUN - Free Report) . The cash proceeds from the transaction are expected to substantially reduce the partnership’s financing needs for its 2016 capital program.

However, Energy Transfer Partners' deteriorating distribution coverage ratio amid the tough business environment is a concern. In fact, the partnership had a distribution coverage ratio of 0.91 in the second quarter. This was not only 17% lower on a year-over-year basis, but also indicates shortage of cash to cover its distribution.

Also, gathering and processing MLPs like Energy Transfer Partners are more sensitive to commodity prices than other MLP subgroups. As a result, the slump in crude prices over the past several months has affected their cash flow stability.

Stocks to Consider

Some better-ranked players in the broader energy sector include Evolution Petroleum Corp. (EPM - Free Report) and China Petroleum & Chemical Corp. (SNP - Free Report) . Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last four quarters, Evolution Petroleum posted an average positive earnings surprise of 45.8%.

China Petroleum & Chemical, on the other hand, posted an average positive earnings surprise of 1,383.3% in the last four quarters.

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