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3 Things Energy Transfer’s CEO Wants You to Know About What’s Ahead

By Matthew DiLallo - Nov 21, 2018 at 6:03PM

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The midstream giant envisions a bright future.

Energy Transfer (ET 3.17%) recently reported excellent third-quarter results as earnings and cash flow rocketed more than 20%, fueled by recently completed pipeline projects. That strong showing has the company's CEO Kelcy Warren bullish about the future, which was evident in his comments on the accompanying conference call. Overall, he detailed three reasons why he believes the midstream giant's best days are still to come.

1. We're developing some of the best projects in our history

Energy Transfer has been winding down a major expansion phase, which has fueled its fast-paced earnings growth. However, at the same time it's been starting up some of its largest projects, it's been adding new ones to its backlog. These latest additions have stood out to CEO Kelcy Warren. He noted on the call that it's not unusual to see small $30 million or $70 million projects earn a mid-to-high-teen return on investment.

However, the CEO said: "It's very unusual to see a few billion dollars invested, and you see those top returns on those assets, too, that's very unusual. Haven't seen that [in] a long, long time, maybe never."

The company's ability to secure high returns on new large-scale projects is why Warren is so "excited about our growth." Overall, the company expects to invest $5 billion into these high-return projects next year, which should drive strong earnings and cash flow growth through at least 2020.

Petroleum storage tanks with the sun setting in the background.

Image source: Getty Images.

2. We'll eventually start returning more cash to investors

With such a large slate of expansions underway, Energy Transfer's priority is to finance those projects while continuing to strengthen its balance sheet. According to CEO Kelcy Warren: "And once we get to that you're going to see one or two things happen. You're going to see either the resumption of distribution increases to our unitholders, which I hope is the case, or if the market doesn't suggest that's what we should be doing, then you'll see us do unit buybacks."

In other words, the company is going to allocate its growing stream of excess cash in a way that creates the most value for investors. If its units still are trading at a dirt cheap level, then the company likely will start repurchasing them. However, if they're selling closer to fair value, then the company could begin increasing its 8%-yielding distribution.

A burst of sunlight shining on a pipeline.

Image source: Getty Images.

3. Mergers and acquisitions remains a big part of who we are

Energy Transfer has grown into one of the largest midstream companies in the U.S. through a balance of organic expansions and acquisitions. While the company made a few smaller deals in the past few years, it hasn't completed a major merger aside from its recent consolidation transaction with its MLP in quite some time because it has focused on firming up its financial foundation.

However, one thing CEO Kelcy Warren made clear on the call is that mergers and acquisitions (M&A) will remain a big part of the company in the future. He stated that:

It's been really firm since we've announced this merger to resume our M&A strategy. We were kind of blocked out of that market for a while. So we are now really churning a lot, which is our style... we kiss a lot of frogs looking for a prince. But we are working it hard. I will tell you though, we are not finding any deals, and what I mean by that is first of all, you've got to have somebody willing to transact with you and then secondly, it needs to be accretive and certainly not leveraging. So we're not finding any deals right now, but that has a way of changing, that has a way of swinging one way or another. And I think when [that swing happens], I think we will be able to see some good opportunities and will be poised and ready.

What's worth noting is that oil prices have come down sharply since he made those comments, which could be the swing needed to make a deal more likely.

Big things are up ahead

Energy Transfer has the wind at its back these days because it recently completed several major expansion projects, as well as combining with its former MLP. Because of that, the company is in a strong position for what lies ahead, which should include completing and securing additional needle-moving projects, sending more cash back to investors, and getting back into the M&A game.

Those factors have the potential to create significant value for long-term investors, which makes the new and improved Energy Transfer a compelling stock to consider buying these days.

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