Last year was both the best of times and the worst of times for Energy Transfer (NYSE:ET). The midstream giant's earnings skyrocketed through the third quarter, putting the company on track for its best ever from a financial standpoint. Investors, however, endured a turbulent year that saw the master limited partnership's unit-price bounce around before tumbling to end 2018, finishing down 20%.
This year should be a better one for the company and its investors. After completing several needle-moving projects last year, Energy Transfer's earnings are on pace to soar to a new record in 2019. Add that to its improving financial profile, which could jump-start its unit price, and this year has the makings of one of its best yet.
Continuing the momentum
Energy Transfer generated more than $6.8 billion in adjusted EBITDA through the third quarter of last year, up 30% versus the same period of 2017. That had the company on track to generate more than $9 billion in EBITDA for the year, which would put it well ahead of 2017's record results. The company's earnings were pushed higher by record volumes flowing through its systems during the third quarter as it transported more oil, natural gas liquids, and natural gas than at any point in its history, due in large part to recently completed expansion projects.
Those volumes and the associated fees they generate should continue expanding in the year ahead. For starters, the company finished several expansion projects late last year that should provide continued momentum in 2019, including phase 2 of its Rover Pipeline in September and Mariner East 2 in December. In addition to the continued benefit from those two large-scale projects, Energy Transfer has several others on the docket scheduled to enter service throughout 2019. Those expansions should drive volumes higher, which led to the company to forecast that its adjusted EBITDA will rise to between $10.6 billion-$10.8 billion in 2019, making it another record year for the MLP.
It could be a great year for investors, too
With Energy Transfer's unit price slumping more than 20% last year even though its earnings rose sharply, the company enters 2019 with a much lower valuation, especially when factoring in the growth it has coming down the pipeline. Given its current unit price and earnings forecast, the company trades and less than 9.5 times projected 2019 profits, which is the cheapest among large pipeline companies and well below the 11.2 times average multiple within its peer group.
Because of that, Energy Transfer has significant upside potential since it should at least trade in line with peers given how fast it's growing. One headwind, however, that appears to be holding it back is its balance sheet, which isn't as strong as rivals. The company is working to address that with it aiming to get its leverage ratio down closer to the level of its peers. That could put it in line for a credit rating upgrade, which would lower future borrowing costs.
Once Energy Transfer hits its targeted leverage ratio, it will free the company up to return more cash to investors above its current high-yielding distribution. It could opt to start increasing that payout again or buy back some of its dirt cheap units, which are now 60% below their peak in 2015. While the company isn't likely to make back all that lost ground this year, there's the potential for a more than 20% rebound in 2019 if its valuation improved closer to the peer group average.
2019 should be one for the record books
After completing several large expansion projects last year, -- with more on the way in 2019 -- Energy Transfer is on track to move record volumes of oil and gas through its system this year. That positions the company to deliver its most profitable year yet. That gusher of earnings could be the catalyst needed to snap the company's unit price out of its doldrums, which sets Energy Transfer up to generate significant total returns in 2019. While the company's unit price likely won't hit a record high, it could still be an exceptional year for investors.