Energy Transfer (ET -0.16%) has grown significantly over the years. The master limited partnership (MLP) has spent billions of dollars buying and building additional midstream assets. This investment spending has driven its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from $7.3 billion in 2017 to a record $13.1 billion last year.
However, the company expects growth to slow considerably this year. It sees adjusted EBITDA roughly flat with last year's level, while projecting that capital spending will fall again this year. This outlook begs the question of whether the MLP can continue growing in the future.
Capital spending is coming down
Energy Transfer expects to invest $1.6 billion to $1.8 billion on growth capital projects this year. Even at the high end, that's less than its $1.93 billion growth capital spending level from 2022. Meanwhile, growth capital spending is down considerably from the $5.5 billion it invested in 2017.
Most of the company's 2023 capital projects are smaller investments that will supply it with incremental cash flow by the end of this year. That's a shift from prior years when the company would invest in large-scale expansions that would take several years to start paying dividends.
Those projects provided lots of visibility into its future growth prospects. However, with capital spending currently focused on short-term projects, there's little growth visibility beyond this year.
Hitting some speed bumps
Energy Transfer does have some larger-scale projects in the pipeline. However, it's having trouble getting them over the finish line.
For example, the company had hoped to make a positive final investment decision (FID) on its Lake Charles LNG project last year. Unfortunately, COO Mackie McCrea noted on the fourth-quarter conference call that "it has taken us longer than we had anticipated. It is extremely competitive out there."
He pointed out that while there's a lot of need for natural gas in the future, there are also a lot of companies going after that demand. Because of that, McCrea noted:
We've got our work cut out for us. Our focus right now is on getting the customers. And we've got a great effort on that, and we still remain optimistic that we will get it to FID.
The company is also working on a potential petrochemical project. However, McCrea noted on the call that "we are in a difficult time. We're in a very down cycle." This means it's having trouble getting potential customers and funding partners to commit to that project.
However, the company believes the cycle could turn up in the next year or so. That leads McCrea to be "optimistic that we'll get more momentum and hopefully get that to FID."
If the company can get those projects over the finish line, it would improve the clarity of its longer-term growth prospects.
M&A as a growth catalyst
Organic growth isn't Energy Transfer's only driver. The company also has a long history of making accretive acquisitions. Its last large-scale deal was in 2021, when it spent $7 billion to buy Enable Midstream. Meanwhile, it made two small bolt-on acquisitions last year, buying Woodford Express for $485 million and Spindletop for $325 million.
CFO Tom Long stated on the fourth-quarter call that "we're going to continue to look at acquisitions." The company plans to continue consolidating in the sector, which could mean making additional smaller-type deals or pursuing a larger-scale transaction. A meaningful deal could help drive growth, much like the Enable acquisition did last year.
Energy Transfer has ample financial flexibility to make a deal. Its leverage ratio has improved to within its 4.0 to 4.5 times debt-to-EBITDA target range, thanks to its growing earnings and using excess cash flow to reduce debt.
At its current distribution level and capital spending range, it will continue to generate excess cash, driving leverage toward the low end of its target range this year. That would give it even more flexibility to make a deal. Meanwhile, its equity value has improved significantly over the past year, giving it an additional currency source for a sizable acquisition.
While visibility is down, it's not lacking potential fuel sources
Energy Transfer's growth will sputter in 2023 due to declining capital spending and other headwinds. However, the company has plenty of catalysts that could reaccelerate its growth in the future. In the meantime, investors get paid very well while they wait for growth to reignite, given the MLP's hefty 9% distribution yield. That income and upside potential make Energy Transfer an attractive investment opportunity.
