Energy Transfer (ET +0.70%) has invested billions of dollars in expanding its midstream infrastructure over the past few years. Many of these projects have recently entered service, which is fueling a big uptick in earnings. During the first quarter, for example, cash flow was up nearly 40% versus the year-ago period. That has the company on track to increase its earnings by about 13% from 2018's total.
However, one thing that Energy Transfer's management team made clear on its recent first-quarter conference call is that the company still has plenty of growth up ahead. Overall, it sees three main drivers that should fuel growth in the coming years: LNG, China, and oil pipelines.
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We continued taking steps toward sanctioning Lake Charles
CFO Thomas Long ran through the latest developments on Energy Transfer's growth projects during the call. He started by pointing out that "in March, we announced that we had signed a project framework agreement with Shell that provides the foundation to further develop the Lake Charles LNG export facility toward a potential final investment decision or FID." The partners are also actively engaged with contractors that would build that proposed facility. These steps put Energy Transfer and Shell on track to approve construction early next year, which could enable them to have it in service and generating cash flow by late 2024 to early 2025.
Given its size, Lake Charles would be a needle-moving expansion project for Energy Transfer. Not only would it earn an attractive return on its multibillion-dollar investment, but the company would benefit from the fact that the facility would utilize "Energy Transfer's vast pipeline network," according to Long. As such, Energy Transfer will likely have opportunities to expand its existing natural gas transportation system to support this project.
We're working to capture more opportunities in China
While the U.S. and China are involved in a major trade dispute right now, America stands to benefit from Asia's nearly insatiable appetite for energy. One way Energy Transfer is taking advantage of China's demand for hydrocarbons is by building the Orbit terminal, which will export ethane to China as part of a joint venture with Satellite Petrochemicals. Long noted that "We continue to make progress on the construction of the project in both the US and China. And we continue to expect the export terminal to be ready for commercial service in the fourth quarter of 2020."
In addition to that project, Long noted that "last month, we were excited to open a new office in Beijing, to continue to expand into new markets and add to our export capabilities to Asia." He further commented by saying, "this strategic move allows us to better leverage the increasing business opportunities in the export of much-needed energy products to China and other Asian markets and to facilitate growth projects across our diverse platform of assets like the Lake Charles LNG export facility, the Orbit ethane export facility and the Nederland and Marcus Hook terminals." While many of those opportunities are on hold due to the trade war, the company sees lots of growth potential once the two countries resolve their differences.
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We're focusing on expanding our existing oil infrastructure
One of the biggest drivers of Energy Transfer's growth over the past few years has been its oil pipeline business. Earnings in its crude oil transportation and services segment, for example, rocketed 74% during the first quarter thanks to rapidly rising output in the Permian Basin and Bakken Shale. Those two regions should continue fueling growth for the company.
Long noted on the call that "we completed a successful open season [on the Bakken pipeline] to bring the current system capacity to 570,000 barrels per day (BPD). ... In addition, Bakken pipeline received sufficient market interest during the open season, such that the partners are also progressing with plans to further increase the system capacity by late 2020, in order to meet growing demands for additional takeaway out of the basin." As that expanded capacity enters service, it will help fuel earnings growth for Energy Transfer.
"Looking at the crude projects in the Permian," stated Long, "we are no longer pursuing the Permian Gulf Coast pipeline, as it was initially announced. However, we will continue to evaluate participation in other projects and we continue to do everything we can to maximize the capacity on all of our Permian crude pipelines, as demand remains very strong." He noted that the company is currently expanding its Permian Express system and will add 120,000 BPD of capacity by the end of the third quarter. That's likely just one of many Permian oil pipeline expansions the company will complete in the coming years.
Expect the fast-paced growth to continue
Energy Transfer has increased its earnings at a 17% compound annual rate since 2015 thanks to its investments in expanding its infrastructure. While it's winding down construction on many large-scale projects this year, it still has plenty of opportunities coming down the pipeline to fuel high-octane earnings growth over the next several years. Add that upside potential to Energy Transfer's 8.7%-yielding distribution and dirt-cheap valuation, and it's one stock that investors won't want to miss.
