Energy Transfer (ET 0.59%) is an active acquirer. It recently bought Lotus Midstream for $1.45 billion. That follows two smaller bolt-on acquisitions last year (Woodford Express and Spindletop) and a more sizable deal in 2021 (Enable Midstream).
The company plans to continue consolidating the midstream sector. That was evident in the comments by its management team on its recent first-quarter conference call.
Focused on enhancing its footprint
AllianceBernstein analyst Jean Ann Salisbury asked Energy Transfer's management team on the first-quarter call about their thoughts on M&A. She said:
Energy Transfer has not been shy about your belief that the sector needs more integration. Can you speak to how you evaluate these opportunities? Looking at Lotus and Enable, is it fair to say that upstream flow into your is kind of a major filter of what you would be looking for?
Salisbury pointed out that two of Energy Transfer's recent acquisitions were of companies focused on gathering oil and gas from upstream production basins. They provided an upstream flow of hydrocarbons into Energy Transfer's extensive midstream footprint.
CFO Tom Long answered by stating:
We do evaluate a lot of the various opportunities that are good bolt-ons if you will to our system. But even if you look at some of the last ones, as you know, the Enable, the Lotus, the Woodford Express. When you really look at these, they all just further enhance our top asset base of the midstream space. And it's something we're going to continue to pursue on those opportunities that make sense.
As Long points out, more than anything else, Energy Transfer is looking for opportunities to enhance its already industry-leading midstream footprint. It's not specifically looking to bolster the upstream flow of hydrocarbons into its midstream network. While it's open to those types of bolt-on deals, it takes a more holistic approach to find opportunities that enhance its overall footprint.
The financials must pencil out
Long then highlighted the other important factor the company considers when making an acquisition, stating:
Here's the next piece that we always evaluate very carefully, and that is that it's accretive. We always want to look at these things and make sure they're going to bring incremental value to our equity holders. And they have, they've all been very accretive to us. And we're always very conservative in how we run our numbers.
Long then pointed out that every deal it has done has exceeded the company's initial forecast. They've also helped improve the company's distribution coverage while also helping lower its leverage ratio.
The Lotus Midstream deal modeled this approach. Energy Transfer paid $900 million in cash and issued the seller 44.5 million of its common units. That financial framework enabled the company to structure the deal so that it would be leverage neutral. The acquisition will also be accretive to its distributable and free cash flow. That will enhance its distribution coverage ratio, allowing the company to continue increasing its already sizable payout.
Lotus is also a great strategic fit. It enhances Energy Transfer's crude oil pipeline footprint in the Permian Basin and increases its storage capacity in the region. In addition, it also provides a great integration opportunity. Energy Transfer is building a new 30-mile pipeline to enhance connectivity in the Permian Basin and provide a direct link to its storage terminals in Midland and Cushing.
Long said the company plans to continue following this model as it pursues future acquisition opportunities. They need to enhance its midstream footprint and be accretive to its financial results.
M&A will help fuel additional growth
Energy Transfer has built an industry-leading midstream business through organic expansions and acquisitions. The company expects to continue consolidating the midstream sector to enhance its leading position. Those accretive deals should grow value for its investors over the long term by giving it the fuel to continue increasing its lucrative distribution.
