Energy Transfer's (ET +0.25%) main attraction is its monster cash distribution. The master limited partnership (MLP) currently yields 7.5%, multiples above the S&P 500's 1.5% dividend yield.
The energy company also offers investors attractive upside potential. Energy Transfer has several potentially needle-moving expansion projects in the pipeline that could supercharge its growth in the coming years. One of the biggest is its Lake Charles LNG export facility. It recently made another big stride toward securing the contracts needed to move forward, putting it closer to approving that project.
NYSE: ET
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Bringing back an old partner
Energy Transfer has entered into a 20-year liquified natural gas (LNG) sale and purchase agreement with energy giant Shell (SHEL 3.39%) for its Lake Charles LNG project. Under the agreement, Energy Transfer will supply Shell with 2.1 million tons of LNG annually. It expects to start making those deliveries in 2026 when it hopes Lake Charles LNG will come online.
The deal is a bit of a homecoming for Shell. It was once a 50/50 partner with Energy Transfer on Lake Charles LNG. However, Shell opted not to proceed with its investment in the project when market conditions soured in early 2020. That left Energy Transfer as the sole equity owner of the proposed 16.45 million ton per year export facility. Instead of being a direct equity investor in the project, Shell will buy gas from Lake Charles if Energy Transfer can push it over the finish line. The company hopes to make a final investment decision by the end of this year.
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Another step forward
With Shell back on board as a customer, Energy Transfer has now secured six contracts over the last five months totaling nearly 8 million tons of capacity. That's almost half of the facility's projected capacity. Shell is also the most noteworthy customer signed. It's the leading buyer of LNG from the U.S. and one of the largest global players in the LNG market.
While Energy Transfer has made a lot of progress with Lake Charles this year, it has a lot more work to do. It must secure customer contracts for the lion's share of the project's remaining capacity. While the company could move forward with a smaller project or start building without securing contracts for all its capacity, it's optimistic it will sell the entire project out.
In addition, Energy Transfer needs to line up funding for the project. CFO Tom Long discussed its plans on the second quarter conference call. He said: "We expect to finance a significant portion of the capital cost of this project by means of sale of equity in the project to infrastructure funds and possibly to one or more industry participants in conjunction with LNG offtake agreements." The MLP hasn't yet secured any equity funding partners. However, it's the type of project that would appeal to infrastructure funds.
A needle-mover in more ways than one
Energy Transfer's funding plan to secure equity partners will dilute its stake. Thus, it won't receive 100% of the cash flows Lake Charles produces in the future. However, it will still be a needle mover for the company since it will collect a portion of the project's associated cash flows backed by long-term contracts with companies like Shell.
Meanwhile, it will see an even bigger benefit further upstream. Long noted on the call: "Upon completion of the LNG project, we expect to realize significant incremental cash flows from transportation of natural gas on our trunk line pipeline system and other Energy Transfer pipelines upstream from Lake Charles." Given the company's extensive pipeline network, it expects to leverage its existing infrastructure to supply natural gas to Lake Charles. That will enable the company to expand systems flowing into Lake Charles, boosting its pipeline cash flows.
Getting closer to securing a dual growth driver
Energy Transfer has worked hard to move forward with Lake Charles after Shell backed out. That's because the LNG facility will supply it with stable cash flows backed by long-term contracts, which now include Shell as a buyer. On top of that, it will provide a boost to the company's pipeline network. Those dual growth drivers make it an important project for Energy Transfer because it could give it more fuel to grow its high-yielding payout in the future.
