Energy Transfer (ET 0.44%) recently increased its already mammoth distribution. The master limited partnership (MLP) now yields a jaw-dropping 9.7%. It expects to continue growing that already enormous payout in the future.
The MLP produces massive cash flow, which helps power this view. They were evident in its recent first-quarter results. They're giving the company plenty of fuel to pay distributions and invest in expanding its operations while maintaining a solid financial foundation.
Drilling down into the numbers
Energy Transfer generated about $3.4 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter, roughly 3% above the prior-year period. Meanwhile, it produced around $2 billion of distributable cash flow, about even with the prior-year period. That easily covered the midstream-giant's cash distribution to investors, which totaled $967 million in the period.
The total distribution outlay was more than 50% above the prior-year's level as the MLP reached its target of returning its payout to its pre-pandemic quarterly peak of $0.305 per unit. Even with the higher payment, the MLP retained significant cash ($965 million) in the quarter.
The MLP used some of that money to fund capital projects. Energy Transfer spent $556 million in the quarter, including $407 million on growth capital projects. The balance of the cash helped strengthen the company's already solid balance sheet. The MLP now expects its leverage ratio to be toward the lower end of its 4x to 4.5x target range.
Energy Transfer's stable cash flow, low distribution-payout ratio, and solid balance sheet put its big-time distribution on a very firm foundation.
Adding fuel to continue increasing its distribution
Energy Transfer recently unveiled its long-term plans for the distribution after achieving its goal of returning the payout to its pre-pandemic level. It aims to increase the payment by $0.0025 per unit each quarter, putting it on pace to grow the payout by 3% to 5% per year.
One factor fueling that plan is its acquisition of Lotus Midstream. Energy Transfer recently closed its $1.45 billion purchase, paying $900 million in cash and issuing about 44.5 million common units.
That deal structure made it leverage-neutral, allowing the MLP to maintain its financial flexibility. Meanwhile, Lotus will be accretive to the company's distributable and free cash flow, giving it more money to sustain and grow the distribution.
Energy Transfer is also investing in several high-return expansion projects that should grow its cash flow in the coming quarters. It expects to invest $2 billion in growth capital projects this year, slightly higher than last-year's total of $1.93 billion.
The company recently added a couple of new expansion projects to its backlog. It's constructing a new 30-mile pipeline to integrate its assets with Lotus Midstream's footprint in the Permian Basin. In addition, it recently announced a natural gas liquids expansion at its Nederland terminal.
Energy Transfer has the financial flexibility to sanction additional expansion projects as it secures enough commercial contracts to support their development. The MLP is currently pursuing several potential developments, including a carbon capture and storage solution for industrial customers in the Lake Charles, Louisiana area.
It can also continue consolidating the midstream sector as it finds compelling acquisition opportunities. Future expansion-related investments should grow Energy Transfer's cash flow, giving it the fuel to deliver on its distribution-growth target.
A high-octane passive-income stock
Energy Transfer has supercharged its distribution over the past year, rapidly bringing it back to its pre-pandemic level. It's now aiming even higher, targeting to grow the ultra-high-yielding payout by 3% to 5% per year.
It has the cash flow, financial strength, and visible growth to support that plan. Because of that, it's an enticing investment option for those seeking a big-time passive-income stream.
