After a strong run-up in April, shares of Energy Transfer (ET 0.55%) rallied even higher and jumped 15% in the month of May, according to data provided by S&P Global Market Intelligence. Bumper first-quarter numbers coupled with rising oil prices fueled investor enthusiasm in the midstream oil and gas stock.
Importantly, some of the things management highlighted during Energy Transfer's Q1 earnings call hint at higher potential returns for shareholders, which partly explains why the stock has continued to rally and is already up 10.5% in June so far.
Energy Transfer earned record net income of $3.29 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) worth $5.04 billion in the first quarter. It was an exceptional quarter, as Energy Transfer made the most of the Texas winter storm by transporting and supplying natural gas available at its facilities to power plants. The supply crunch triggered by power cuts also meant Energy Transfer could sell huge volumes at high prices and earn an incremental $2.4 billion in adjusted EBITDA.
The windfall gain allowed Energy Transfer to repay debt worth nearly $3.7 billion in Q1, thus taking the company one step closer to achieving its target debt-to-EBITDA ratio of 4 to 4.5 times. Now here's why this milestone is important from a shareholder viewpoint: Once Energy Transfer reaches its debt target, it wants to return any additional cash flows to shareholders in the form of share repurchases or dividend increases.
A stronger balance sheet and the prospects of a higher dividend appealed to shareholders. Energy Transfer also bumped up its 2021 growth capital expenditure to $1.6 billion as it found "several small opportunistic projects." In addition, the company is accelerating some projects originally scheduled for 2022, given the strong oil markets. That again is an encouraging sign for investors. At the Williston Basin Petroleum Conference in mid-May, Energy Transfer's CEO Kelcy Warren even revealed his interest in expanding Energy Transfer into chemicals.
Energy Transfer is already on track to acquire Enable Midstream Partners (ENBL), which is expected to be immediately accretive to its cash flows. Also, it expects growth expenditure to be only around $500 million to $700 million per year in 2022 and 2023, which should free up more cash for the company. If oil prices remain favorable, Energy Transfer could be up for bigger things, which explains the ongoing rally in Energy Transfer shares and why I recently picked this 5.6% yielding stock as one of the top oil stocks to consider.