Energy Transfer (ET) is already one of the most diversified midstream companies in the country. The master limited partnership (MLP) has assets up and down the oil and natural gas value chain, providing a full range of services from the wellhead to the water.
However, that's not stopping the company from continuing to expand its service offerings. One potential new source of growth it's exploring is expanding into the petrochemical industry. That move could provide even more fuel for Energy Transfer to grow its distribution in the future.
Evaluating adding another new growth driver
Energy Transfer's management team discussed its growth ambitions on its first-quarter conference call. The MLP's CFO, Tom Long, noted that it was exploring several opportunities to expand its existing infrastructure network, including new natural gas pipelines and converting its legacy natural gas import facility into a liquefaction and export terminal. In addition to growing those existing businesses, Long noted that the company "continue(s) to evaluate the opportunity to develop a petchem project along the Gulf Coast."
Specifically, Energy Transfer is looking to build a cracker plant that would convert natural gas liquids (NGLs) into petrochemicals. Long stated: "We believe that our cracker will be a very unique world-class facility, providing unparalleled access to the lowest cost feedstock through our pipeline systems, as well as unparalleled access to downstream domestic and international ethylene and propylene markets through our pipelines, our storage facilities, and our export terminal."
The CFO noted that the company is in discussions with several high-quality customers to purchase petrochemical products produced by the plant under long-term agreements. It's hoping to secure enough customer agreements to support the project so that it can make a positive final investment decision. Long also noted that Energy Transfer intends "to have a significant partnership with one or more industry participants" to help finance the construction.
In addition to potentially building a petchem plant, Long said the company continues "to evaluate potential M&A opportunities in the petchem space."
Why the interest in expanding into petrochemicals?
There are several reasons Energy Transfer is exploring a potential expansion into the petchem space. A big driver is that sector has been growing steadily over the years, which seems likely to continue. For example, while oil demand plunged during the early days of the pandemic, demand for petrochemicals like ethylene and propylene held steady. Overall, consumption of those two petchem feedstocks has delivered compound annual growth rates of 2.8% and 3.5%, respectively, over the last decade, growing faster than oil (0.3%) and the global economy (2.4%). Demand for petrochemicals should continue rising in the future, fueled by a growing middle class and their desire for a higher quality of life.
Meanwhile, petchem plants can be ideal MLP assets because they can generate predictable cash flows. For example, rival MLP Enterprise Products Partners (EPD 0.48%) has been building petchem facilities supported by long-term, fixed-fee take-or-pay contracts with high-quality customers. The company signed contracts with plastics and chemicals giant LyondellBasell and Japanese trading and investment conglomerate Marubeni Corporation to support its latest petchem plant, which it should complete next year. Those contracts will supply Enterprise with predictable cash flow to support its growing distribution.
Another benefit of wading into the petrochemical market is would further enhance the value of Energy Transfer's existing assets. As Long noted, its project would have unparalleled access to low-cost supplies and export markets through its pipelines, storage facilities, and export terminal. It might have opportunities to expand those assets in the future to support its petchem business.
The potential for more fuel to grow the distribution
Energy Transfer has made it clear that it wants to grow its already attractive 7.2%-yielding distribution at least back up to its former peak. However, with a growing pipeline of expansion projects, the MLP could have the fuel to increase its payout even further in the future. That makes it an enticing option for investors seeking a potentially high-octane passive income stream.