Energy Transfer(ET 2.22%) doesn’t get much respect from the market these days. That’s apparent from its current distribution yield, which is approaching double digits. It’s a sign that the market doesn’t believe the master limited partnership (MLP) can sustain its payout. That unbelief is weighing on the company’s valuation, pushing up its yield.
There’s reason for investors to be skeptical of Energy Transfer. The company previously cut its payout in half during the pandemic to preserve cash. However, the MLP has come a long way since that time. It has not only returned its payout to its pre-pandemic level but has also started pushing it past that peak. Because of that, investing $1,000 in the MLP would be a wise move for income-seeking investors to make this June.
Trying to earn back investors’ respect
Energy Transfer made the tough decision to slash its distribution by 50% in late 2020 to retain more cash to fund expansion projects and repay debt. However, the company pledged to investors to return its payout to its pre-pandemic peak as its leverage ratio fell toward its target range of 4.0 to 4.5 times debt-to- earnings before interest, taxes, depreciation, and amortization (EBITDA).
It has since delivered on that promise. Earnings growth and retained cash have helped drive leverage down to within that range. That allowed the MLP to steadily increase its distribution. The payout finally returned to its pre-pandemic level this past January.
On a much more sustainable foundation
Energy Transfer’s big-time distribution is on a much more sustainable base these days. The MLP produced $2 billion of distributable cash flow in the first quarter. That was enough to cover its reset payout with $965 million to spare. This excess cash fully funded the company’s expansion program ($407 million of growth capex in Q1), enabling it to further strengthen its balance sheet.
The company recently used some financial flexibility to acquire Lotus Midstream for $1.45 billion (it paid $900 million in cash and issued 44.5 million common units to the seller). That mix enabled the MLP to structure the deal so it’s leverage neutral while being accretive to its distributable and free cash flow.
Even with that deal, the company expects its leverage ratio to trend toward the lower end of its target range going forward. Add that to its significant free cash after covering the distribution and capital program, and the payout is on a very solid foundation.
Setting the stage for the next phase of growth
Energy Transfer’s strong financial profile and growing business give it confidence that it can steadily increase its distribution in the future. The company recently unveiled plans to raise its distribution by about $0.0025 per unit each quarter, putting it on track to grow by 3% to 5% per year.
Three factors support the company’s ability to steadily increase its payout:
Excess financial capacity: The MLP has the financial flexibility to increase its payout ratio while still retaining enough cash to fund expansions and maintain a strong balance sheet.
Organic expansions: Energy Transfer expects to invest $2 billion in expansion projects this year. That’s up from its initial budget range of $1.6 billion to $1.8 billion. It added a new 30-mile pipeline to connect Lotus’ system to its existing assets and a $1.25 billion expansion of its Nederland Terminal that should enter service in 2024 and 2025, respectively. Meanwhile, the company has several more expansion projects in development.
The company’s financial flexibility will allow it to continue approving high-return organic expansions and make accretive acquisitions to grow its cash flow to support a rising distribution.
A strong base return with upside potential
Energy Transfer pays a rock-solid distribution that currently yields nearly 10%. That could turn a $1,000 investment into almost $100 of annual income. That’s a nice base return.
This payout should rise by 3% to 5% annually as the company completes expansion projects and makes accretive acquisitions. That steady growth should also help boost the company’s valuation. These factors position the company to potentially produce attractive total returns, making Energy Transfer look like a wise investment this month.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
