Energy Transfer (NYSE:ET) has invested billions of dollars over the past few years to expand its energy infrastructure empire. That spending has been fueling fast-paced earnings growth, which it expects will continue during the fourth quarter. That's one of several things investors should keep an eye on when the high-yielding pipeline company reports its results later this week. Here are three more.
1. See if the company delivered on its growth expectations
Heading into 2019, Energy Transfer anticipated that it would generate between $10.6 billion and $10.8 billion of adjusted EBITDA, which would be about 12.5% ahead of 2018's level at the midpoint. However, after producing stronger-than-expected results throughout the year, the company steadily boosted its guidance range. Its most recent update projected adjusted EBITDA between $11 billion and $11.1 billion, or about 16% above 2018's result.
That forecast implies Energy Transfer will produce $2.6 billion to $2.7 billion of adjusted EBITDA during the fourth quarter. Ideally, it will hit that target. If not, then investors should see what caused the miss. A short-term impact like a timing issue or temporary outage wouldn't be a concern. What would be more worrisome is if the company encountered a problem that would have a longer-term impact on its financial results.
2. Examine its outlook for 2020
Energy Transfer has been growing its earnings at a double-digit compound annual rate for the past several years. That trend appears poised to continue in 2020, which is something investors should expect to see when it unveils its outlook.
Two factors drive this view. First, the company planned to invest $4 billion in expansion projects last year and anticipates spending another $3.6 billion to $3.8 billion this year. Several of those projects entered service toward the end of last year, while a few more will start up this year, which should help boost its EBITDA.
In addition to that, Energy Transfer recently closed the acquisition of SemGroup. Not only will the company benefit from the cash flows of those assets, but it also expects to capture significant cost savings, which should boost its EBITDA. In the company's view, it can cut $170 million in expenses due to the SemGroup deal. Investors should see if the company still expects to achieve that target.
3. Check whether it added any more expansion projects
Energy Transfer is reaching the end of a multiyear, multibillion-dollar expansion program. As noted, capital spending will decline from $4 billion last year to between $3.6 billion and $3.8 billion this year. Meanwhile, the company only had $1.5 billion of approved capital projects lined up for beyond this year as of its last update.
The company does, however, have several expansion projects in development, including a large-scale LNG export project with Shell (NYSE:RDS.A) (NYSE:RDS.B). Investors should see if it approved any more expansions during the quarter.
If not, then the energy company could soon have the financial flexibility to begin returning more cash to investors. Energy Transfer's earnings growth over the past few years has helped improve its leverage ratio, especially since it financed last year's spending without issuing any more debt, which it expects to repeat in 2020. While it was still a bit shy of its leverage target during the third quarter, once it reaches its goal, it could initiate a unit repurchase program or increase its already attractive 9.5%-yielding distribution. Given those possibilities, investors should consider whether the company provides any guidance on what it might do with its upcoming financial flexibility.
All eyes on what's farther ahead
Energy Transfer's heavy investments to expand its energy infrastructure platform should have continued paying dividends during the fourth quarter. They should also provide the company with the fuel to keep growing at a fast pace this year. What's not quite as clear is what direction the company will take beyond 2020, given the currently expected drop-off of expansion-related spending. It could shift gears and start returning more money to investors, which is a key storyline to watch not only when it reports earnings this week but also throughout the year.