This year has been another record one on the financial side for Energy Transfer (ET -1.23%). The pipeline giant is on track to generate between $11 billion and $11.1 billion in adjusted EBITDA this year, up more than 16% from 2018's level. That's an improvement from its initial view that it would produce between $10.6 billion and $10.8 billion of adjusted EBITDA in 2019.
While the energy company hasn't put out its official guidance for 2020 just yet, it should be another record year. That was evident given all the growth the company has coming down the pipeline, which its management team discussed on the third-quarter conference call.
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More organic expansion projects are coming online
One of the key drivers of Energy Transfer's earnings growth this year has been the impact of its recently completed expansion projects. During the third quarter, for example, earnings in its natural gas liquids (NGL) and refined products segment soared 34% year over year. Driving that surge was the start-up of the Mariner East 2 pipeline at the end of last year and the completion of another NGL processing plant in early 2019.
That fast-paced growth should continue in 2020, given that Energy Transfer spent another $4 billion to expand its midstream empire this year and expects to spend at least that much in 2020. Several of those projects recently started up, which CFO Tom Long ran through on the call:
During the third quarter we successfully brought on the Arrowhead III processing plant online, bringing our total processing capacity in the Permian Basin to approximately 2.5 Bcf per day. In addition, Phase 2 of our Red Bluff Express Pipeline is now complete. The J.C. Nolan Pipeline went into service in August and Permian Express 4 went into full service Oct. 1.
These four projects will provide a boost not only in the fourth quarter but also to its 2020 results.
Meanwhile, the company has several other projects coming online over the next year, which will further bolster its results. In the NGL segment, Long noted: "Our further expansion efforts at Marcus Hook are under way and progressing nicely with increased facility capacity expected for fall 2020. Due to the permit bar, ME2X is now expected to be completed in mid-2020." Meanwhile, it should also finish its Lone Star Express expansion and Orbit Ethane Export terminal by the end of next year. These and several other smaller projects should help fuel meaningful earnings growth next year.
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An acquisition-fueled jolt ahead
In addition to all that organic growth, Energy Transfer will get an additional boost from its pending acquisition of SemGroup (SEMG), which should close next month. That company is on track to generate more than $400 million of adjusted EBITDA this year. As such, it will provide a meaningful uplift to Energy Transfer's results in 2020.
In addition to that, the companies believe they can capture $170 million of cost savings from the combination. Long noted that this "includes financial savings of more than $50 million within the first year by utilizing Energy Transfer's lower borrowing cost." He pointed out that the company has already secured a $2 billion, three-year term loan with its banks that it plans to use to refinance all SemGroup's high-cost debt. Long also noted that the companies would also save "$40 million from the elimination of duplicative public company costs and increased efficiencies." The final $80 million will come as it increases the utilization of SemGroup's assets in the coming years by integrating them into its network.
That deal will provide a further boost in 2021 because it's facilitating the development of the Ted Collins Pipeline. That pipeline will connect Energy Transfer's Nederland terminal to SemGroup's Houston Fuel Oil Terminal Company, giving customers more options. Because of that, it could enhance Energy Transfer's ability to expand elsewhere, which would allow it to continue growing at a fast pace.
Another strong year ahead
Energy Transfer appears poised to deliver another record year in 2020. Its acquisition of SemGroup alone should boost its bottom line by around 5%. Add in another wave of expansion projects, and it could deliver double-digit earnings growth again next year.
However, despite its strong performance this year and healthy growth prospects, units of the master limited partnership have surprisingly slumped nearly 8% this year. As a result, it trades at a rock-bottom price. At some point, the market will likely realize that this is a mistake. Add that upside potential to the company's high-yielding distribution -- which is now up to an eye-catching 10% -- and Energy Transfer could generate big-time total returns in the coming years.
