Energy Transfer (ET 0.05%) hit the financial accelerator during the third quarter as it benefited from recently completed expansion projects. That trend should have continued in the fourth quarter, but its recent earnings growth is just one of the things investors should focus on when the pipeline giant reports results later this week.
1. Look for continued high-octane earnings growth.
During Q3, Energy Transfer's earnings surged more than 30% and cash flow jumped more than 25%, thanks to higher volumes flowing through the company's systems. That volume growth stemmed both from improved oil prices and the recent start-up of several of its expansion projects, including the Rover Pipeline.
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Those impressive year-over-year gains should have continued in Q4 because the company brought the last two segments of Rover into commercial service in November, and finished up Mariner East 2 ahead of year's end. One potential issue to keep an eye on, however, is the plunge in oil prices, which may have had an impact on the company's midstream, crude oil, and natural gas liquids and refined products segments -- each of which has some direct exposure to commodity prices.
2. See if it secured any new projects.
Energy Transfer made excellent progress on extending its growth further during 2018 by locking up several more expansion projects. One of the largest is the Permian Gulf Coast Pipeline, which should come into service by the middle of next year.
The company had several other projects in development, and investors should be on the lookout for news about its progress in securing enough customers to move forward with their construction. In mid-October, for example, the company started soliciting shippers for an expansion of its Bakken Pipeline system, which would transport more crude oil out of North Dakota. And at the end of November, the company launched a similar process for its Mariner East Pipeline System. Finally, the company has also been working to turn its Lake Charles LNG facility into an export complex. Success in securing clients for these and other projects could enable the company to continue growing earnings and cash flow at a fast pace well beyond next year.
3. Check for any changes to its 2019 plans.
Energy Transfer unveiled its initial guidance for 2019 during Q3. The company estimated that it would generate between $10.6 billion to $10.8 billion in adjusted EBITDA this year, up from the more than $9 billion it anticipated in 2018. Further, the company expects to spend roughly $5 billion on expansion projects in 2019.
However, a lot has changed in the oil market since the company made those announcements, including a significant decline in crude prices. Those lower prices could have impacted the company's earnings, and may lead it to revise its spending plan.
Another thing that investors should monitor is the company's capital return plans. Energy Transfer pays a well-above-average distribution that currently yields 8.1%. It had hoped to start increasing the payout as cash flow grew, but has opted to retain more excess cash to help finance some of its expansion projects, as well as improve its leverage ratio so that it can earn a credit rating upgrade.
Given that near-term focus on improving its credit rating, investors should check to see how close the company is to achieving its desired metrics. In addition to that, they should be listening for any hints about how the company might reward shareholders after it earns that upgrade. Fellow pipeline giants Kinder Morgan (KMI +0.74%) and Enterprise Products Partners (EPD 1.77%), for example, have both initiated $2 billion stock repurchase programs, taking advantage of how cheap midstream valuations are these days to opportunistically return cash to investors. Based on that growing trend, it wouldn't be a surprise if Energy Transfer hints that a buyback could be in its future too; its unit price has declined by a double-digit percentage over the past year even though its cash flow has increased significantly. As a result, it's trading at an even lower valuation.
Lots to watch this quarter
Energy Transfer should deliver strong fourth-quarter results thanks to its recently completed expansion projects, which should more than offset the impact of plunging crude prices. However, it's unclear whether the slump in the oil market will have any effect on the company's guidance for 2019 or its plans to eventually return more cash to investors. Investors should pay close attention to any hints about what's ahead when the company reports its results later this week.
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