Energy Transfer (ET -0.19%) offers investors a monster yield. The master limited partnership's (MLP's) payout currently clocks in at more than 9%. While yields that high are often at higher risk of a reduction, that's far from the case for Energy Transfer. The company recently increased its payout by another 15%, fueled by its improving balance sheet and strong financial results.
Here's a closer look at its most recent numbers, which should give investors lots of confidence in the strength of its monster distribution.
Drilling down into Energy Transfer's fourth-quarter report
Energy Transfer generated $3.44 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the fourth quarter, up 22.4% from the year-ago period. That drove its full-year total to a record $13.1 billion. Meanwhile, the company produced $1.91 billion of distributable cash flow in the quarter. That was an increase of 19.4% from the prior-year period. It provided the MLP with enough money to cover its distribution with $965 million to spare.
For the full year, Energy Transfer produced $7.4 billion in distributable cash flow and $4.4 billion in excess cash after paying the distribution. That covered its entire $1.93 billion in growth capital spending and two small acquisitions with room to spare, allowing the company to reduce debt by $800 million for the year.
Overall, the MLP capped an excellent year by growing earnings across the board in the fourth quarter:
Data source: Energy Transfer. Chart by the author.
The company delivered several operational highlights in the period that helped fuel those strong results. It set several partnership records in the quarter, including:
- Natural gas liquids (NGL) fractionation volumes (up 7%).
- NGL transportation volumes (up 5%).
- Midstream throughput volumes (up 32%).
- NGL exports at its Nederland terminal.
The pipeline company benefited from strong market conditions, the acquisition of Enable Midstream in late 2021, two small bolt-on acquisitions last year, releases from the U.S. Strategic Petroleum Reserve (SPR), and recently completed expansion projects.
Energy Transfer completed several expansion projects in the quarter that should contribute to its results in 2023. It placed the Grey Wolf processing plant, Gulf Run pipeline, and the new 3 million barrel storage cavern into service. The company also completed the modernization and de-bottlenecking work on its Oasis Pipeline, adding to its capacity.
A look at what's ahead for Energy Transfer
Energy Transfer also revealed its outlook for 2023. The MLP expects to deliver fairly stable earnings as it sees its adjusted EBITDA between $12.9 billion and $13.3 billion. At the high end, earnings would increase by about 2%. While the company expects to benefit from recently completed expansion projects and higher volumes, it sees headwinds from lower commodity prices and the absence of one-time items from last year -- like the SPR releases -- impacting its results.
Meanwhile, the MLP expects to invest $1.6 billion to $1.8 billion on expansion projects in 2023, which is down from last year. It has several projects underway that it expects to finish this year, which should contribute additional cash flow.
In addition to those near-term projects, the company is spending some preliminary money on a potential carbon-capture project with Occidental Petroleum (OXY -0.09%). They're working to obtain long-term commitments to transport and store carbon dioxide produced by industrial customers in Louisiana. Carbon capture represents an enormous opportunity for Energy Transfer and the energy industry. Occidental Petroleum estimates it could be a $3 trillion to $5 trillion industry in the future. The oil company believes it could eventually contribute as much in earnings as it currently makes from oil and gas production.
With Energy Transfer expecting roughly stable earnings and declining capital spending, it should produce more free cash flow this year. That will give it plenty of money to cover its distribution with room to spare, allowing it to maintain a strong balance sheet. The company recently achieved its targeted leverage range between 4.0 to 4.5 times debt-to-adjusted EBITDA. Because of that, the company has the flexibility to pursue additional expansion projects or opportunistic acquisitions.
The big-time yield is extremely secure
Energy Transfer's growing earnings and cash flow gave it the funds to repay debt, invest in expanding its operations, and steadily increase its distribution. With the company on track to produce more cash this year, its payout is on a very firm foundation. That makes Energy Transfer a great option for investors seeking a big-time yield.
