Energy Transfer (NYSE:ET) ended 2019 on a high note as its earnings came in above the top end of its already upwardly revised forecast range. That high-end result came despite the growing presence of some headwinds across several of its business segments.

Those issues, unfortunately, will continue affecting the company in the coming year, which was evident in its rather lackluster guidance.

Drilling down into Energy Transfer's fourth-quarter results

Metric

Q4 2019

Q4 2018

Change

Adjusted EBITDA

$2.807 billion

$2.669 billion

5.2%

Distributable cash flow (DCF)

$1.546 billion

$1.516 billion

2%

DCF per unit

$0.57

$0.58

-1.7%

Distribution coverage ratio

1.88 times

1.90 times

-1.1%

Data source: Energy Transfer. 

Energy Transfer grew its adjusted EBITDA by 5% versus the year-ago period during the fourth quarter, pushing its full-year total to $11.2 billion. That was nearly 18% higher than 2018's level and above the company's upwardly revised $11 billion to $11.1 billion guidance range. DCF, meanwhile, rose 2%, pushing the full-year total to $6.3 billion, up more than 17% year over year. That was enough cash to cover the MLP's massive 9.6%-yielding payout by an ultra-comfortable 1.96 times.

Fueling the company's fourth-quarter growth were its two-liquids focused segments:

Energy Transfer's earnings by segment during the fourth-quarter of 2019 and 2018.

Data source: Energy Transfer. Chart by the author.

Earnings in the NGL and refined products segment surged more than 30% year over year during the fourth quarter. Fueling that growth were higher volumes on several of its legacy systems and the completion of three major expansion projects, including the Mariner East 2 pipeline, which started up at the very end of 2018.  

Crude oil transportation and services earnings rose 12% from last year's fourth quarter. The main driver was a favorable inventory valuation adjustment.

The earnings growth in those two segments more than offset weaker results across the rest of Energy Transfer's business units.

Earnings in the MLP's intrastate segment slumped nearly 28% due to lower realized natural gas sales and lower realized gains from pipeline optimization activity. Interstate segment earnings, meanwhile, fell almost 10%, due mainly to higher costs. Meanwhile, the profit contribution from its investment in Sunoco (NYSE:SUN) fell about 7% due to lower margins at the fuel distribution company.

A row of pipelines with the sun rising behind them

Image source: Getty Images.

A look at what's ahead for Energy Transfer

Energy Transfer expects to generate between $11 billion and $11.4 billion of adjusted EBITDA this year, which would be roughly flat with last year's level at the midpoint. That's despite the fact that the company closed its acquisition of SemGroup in December and completed several expansion projects last year, with more on deck to start up in 2020. The main issue is that many of the company's commodity price and market-sensitive businesses, which benefited from healthy market conditions in 2019, are starting to face some headwinds that will weigh on results this year. On top of that, it has several legacy contracts expiring that will likely renew at lower rates.

The energy company expects to invest another $3.9 billion to $4.1 billion on expanding its energy infrastructure footprint this year. While that's a bit below last year's level of $4.3 billion, it's slightly higher than its initial capital spending forecast of $3.6 billion to $3.8 billion due to the acquisition of SemGroup, which will add $300 million in capital projects.  

However, the company anticipates that capital spending will decline considerably after this year, with it expecting an annual run-rate in the $2 billion to $2.5 billion range. That's in part because it's raising its return criteria for new expansion projects. It already has $1.8 billion of approved projects in its backlog beyond this year, which is a $300 million increase from the end of last quarter.

With Energy Transfer producing more than $3 billion of annual free cash flow after paying its distribution, it's on track to generate enough cash in 2021 to also cover capital spending with room to spare. As such, it could be in the position to increase its distribution or repurchase some of its deeply discounted units.  

Well positioned for what's ahead

Energy Transfer ended 2019 on a high note by producing guidance-beating results. Unfortunately, some notable headwinds appear as if they'll prevent it from growing this year. However, that won't have too much of an impact on the company since it generates a lot of cash, giving it the funds to cover its big-time distribution as well as the bulk of its expansion-related spending. Because of that, and the projection that capital spending will fall next year, its monster payout is on rock-solid ground.