Energy Transfer (ET 2.55%) is a big-time income producer. The master limited partnership (MLP) currently offers a lucrative cash distribution that yields nearly 8%.
One reason the payout is that high is due to concerns about its long-term sustainability as the world transitions to lower-carbon fuels. Energy Transfer is working to address these concerns by looking at ways to reduce its emissions through carbon capture and sequestration (CCS). It's a potentially massive market opportunity that could help sustain and grow its high-yielding payout in the coming years.
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The first step
Energy Transfer formalized its efforts to reduce carbon emissions last year by creating an alternative energy group. One of the opportunities it has started pursuing is CCS, a process that captures carbon dioxide from the air and stores it underground. It's initially looking at projects that would capture carbon dioxide at natural gas gathering and processing facilities. The company would transport the captured carbon to sequestration hubs, earning some incremental cash flow by monetizing federal tax credits.
The MLP unveiled its first potential project this month. CFO Tom Long discussed it on the company's second-quarter conference call. He stated:
We recently entered into a letter of intent with CapturePoint Solutions to pursue the joint development of a carbon capture and sequestration hub in Louisiana. This project would involve the installation of carbon capture equipment at several natural gas treating plants in the Haynesville area and the transport by pipeline of CO2 to a sequestration site that CapturePoint is developing. Preliminary cost estimates, as well as projections of cash flow and tax credits, indicate that this project will generate an attractive financial return.
That's the first of what could be many projects. Long also noted on the call that Energy Transfer is in discussion with several other carbon dioxide sequestration site developers on potential projects. That includes some near its proposed Lake Charles LNG export facility. By linking CCS to that project, the company could offer low-carbon LNG to the global export market, making it more appealing to potential buyers. That could enable it to secure the long-term contracts needed to push that project toward construction.
A potentially lucrative market opportunity
The CCS market is in the early stages of development. As Long noted on the call, Energy Transfer believes its Haynesville project will produce an attractive financial return thanks partly to monetizing tax credits. That would provide the company with incremental cash flow as it reduces emissions from some facilities.
However, there's a much bigger opportunity in CCS by sourcing emissions from large-scale emitters in the industrial and energy industries. Oil giant Occidental Petroleum (OXY 7.11%) estimates that CCS could become a $3 trillion to $5 trillion global industry one day. That's leading Occidental Petroleum to invest heavily in building out CCS infrastructure, including developing the largest project to extract carbon dioxide from the air. The oil company believes it could eventually earn as much money capturing and storing carbon as it currently does from producing oil and gas.
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Energy Transfer wants in on this opportunity. It believes it can repurpose some existing pipelines and build new ones to help transport carbon dioxide to sequestration sites. It's also looking into projects that could utilize captured carbon for enhanced oil recovery or industrial applications.
As the market for captured carbon emerges, it could provide Energy Transfer with more lucrative commercial opportunities. These future projects would help grow the company's cash flows while making its legacy fossil fuels businesses more sustainable. That would put its big-time distribution on a much firmer foundation for the long term.
The first step toward a potentially lucrative market
Energy Transfer is making strides to capitalize on the emerging CCS market. It has major implications because it would help lower the company's carbon emissions and grow its cash flow. Those factors would put its high-yielding distribution on a more sustainable foundation, which is why investors should watch its CCS developments closely.
