Energy Transfer (ET 0.38%) is at it again. The large-scale energy midstream company is making yet another sizable acquisition. This time it's acquiring privately held Lotus Midstream in a $1.45 billion deal.
Here's a closer look at Energy Transfer's latest deal and how it will benefit the company's big-time distribution.
Drilling down into the Lotus Midstream deal
A highly strategic deal
Energy Transfer's acquisition of Lotus Midstream will bolster the MLP's crude oil pipeline footprint in the resource-rich Permian Basin. It will add 3,000 miles of oil gathering and transportation pipelines across the Basin's core, including the Centurion Pipeline. The company's system has the capacity to transport 1.5 million barrels of oil per day. Lotus also owns 2 million barrels of oil storage capacity. In addition, Lotus has a 5% interest in the 650-mile Wink to Webster pipeline system that moves oil to the Gulf Coast.
The master limited partnership (MLP) plans to build a new 30-mile pipeline project to connect its network with Lotus' system. The company expects to complete that pipeline in the first quarter of next year. It will enable Energy Transfer and its customers to move oil from terminals in the Midland Basin to the country's largest oil hub in Cushing, OK.
A financially positive transaction
Energy Transfer is paying $900 million in cash and issuing 44.5 million of its units to acquire Lotus Midstream. That financing structure will have a neutral impact on Energy Transfer's leverage metrics. The company recently achieved its targeted leverage range of 4.0 to 4.5 times debt-to-earnings before interest, taxes, deprecation, and amortization (EBITDA). As a result, the deal will allow the company to maintain a solid balance sheet.
Meanwhile, the deal will be immediately accretive to the company's free cash flow and distributable cash flow per unit. As a result, the Lotus acquisition will positively impact the company's financial profile. It will put the MLP's distribution, which yields over 10% following a 75% increase over the past year, on an even firmer foundation.
The consolidation continues
The Lotus Midstream deal should come as no surprise to Energy Transfer investors. The MLP has a long history of making acquisitions:
Image source: Energy Transfer Investor Relations Presentation.
The Lotus deal is smaller than its $7 billion Enable Midstream acquisition that closed in late 2021 and helped fuel record results last year. However, it's bigger than the $810 billion the company spent on its bolt-on acquisitions of Woodford Express and Spindletop last year. Meanwhile, structuring a leverage-neutral and free cash-flow-positive transaction maintains the company's financial flexibility. That could allow it to make another deal if an attractive opportunity arises.
Acquisitions could become an even more important growth driver for Energy Transfer in the future because it's investing less money on organic expansions. Before agreeing to acquire Lotus, Energy Transfer expected growth-capital spending to be between $1.6 billion and $1.8 billion this year. That's down from the $1.93 billion it invested last year and the $5.5 billion it invested in 2017. The company has also shifted its capital-spending focus from larger-scale, needle-moving projects to shorter-cycle investments that produce cash flow more quickly, like the 30-mile pipeline it's building to connect its system to Lotus Midstream. That strategy reduces the drag on its balance sheet of projects that consume instead of generate cash, positively impacting its ability to pay distributions.
Ensuring the distribution remains well fueled
Energy Transfer's acquisition of Lotus Midstream will enhance its footprint in the Permian Basin and its financial profile. Because of that, it will further improve the sustainability of the company's massive distribution. That makes the company's payout look even more attractive for those seeking a big-time yield.
