Energy Transfer's (ET 0.53%) growth capital sending has fallen off a cliff in recent years. It only invested $1.9 billion last year and expects capital spending to be around $2 billion this year.
That's a lot less than the $4.9 billion it spent in 2018. Reduced capital spending is slowing its growth.
However, the company sees a reacceleration ahead. That will supply the energy midstream giant with the fuel to deliver on its plans of increasing its 9.5%-yielding distribution by 3% to 5% per year.
NYSE: ET
Key Data Points
A growth reacceleration is coming
Energy Transfer's earnings declined during the second quarter. Distributable cash flow fell from roughly $1.9 billion in last year's second quarter to nearly $1.6 billion this year. While the company achieved record volumes across many of its segments, lower commodity prices impacted cash flow.
However, the company sees an earnings reacceleration ahead, fueled partly by a growing list of attractive expansion projects. CFO Tom Long commented in the second-quarter conference call that Energy Transfer has an "incredible backlog of growth opportunities." That's leading the company to boost its capital spending outlook to $2 billion-$3 billion in the coming years.
Long discussed a few of the growth projects it's pursuing on the call. The CFO noted that the company's two export terminals (Nederland and Marcus Hook) "continue to benefit from increased demand, both in the U.S., as well as from international customers." He stated, "We remain bullish that there will be significant long-term growth in international demand for ethane and LPG products as we are well-positioned to benefit from that demand."
Energy Transfer has already approved a nearly $1.3 billion project to expand the natural gas liquids (NGL) capacity at Nederland, which should enter service in the middle of 2025. Meanwhile, the CFO noted that the company's pursuing an "optimization project at our Marcus Hook terminal that would add incremental ethane refrigeration and storage capacity."
It's also in discussions to add 1 billion cubic feet of capacity to its Gulf Run pipeline by adding more compression. That project would require a minimal capital investment. However, depending on demand, it could loop the system to add another 2 billion cubic feet of capacity.
The company is also starting to make progress on the alternative energy front. It's working on a carbon capture and storage project with CapturePoint for some of its natural gas treating plants in Louisiana.
In addition, it's pursuing a larger-scale carbon capture and sequestration solution in the Lake Charles area with oil giant Occidental Petroleum. It would build a new pipeline to transport carbon dioxide to Occidental's proposed Magnolia hub for sequestration.
Hitting the restart button
Another major project Energy Transfer continues to pursue is Lake Charles LNG. It would convert an existing natural gas import facility into an LNG export terminal.
This project has faced a series of setbacks over the years. The most recent was a denial by the Department of Energy (DOE) to extend its authorization to export natural gas to 2028. It needed that extension to complete the long-delayed project.
However, the DOE has refused its request for a rehearing of that decision. As a result, Energy Transfer has decided to start from scratch by filing a new export authorization application, which it expects to complete this month.
Energy Transfer has made significant headway in securing the customers it needs to support the project. In July, it signed offtake agreements with three customers for 3.6 million metric tons of LNG per year. That added to the deals it previously secured for 7.9 million tons, or almost half of its proposed 16.5 million tons per year capacity.
The company is also close to securing joint venture partners to help finance the project. COO Mackie McCrea commented on the call, "[W]e can say that we have two very significant partners at a minimum, it's one to step up for a large amount of the equity, as well as a lot of the offtake."
Lake Charles could be a major growth driver for Energy Transfer because it would significantly increase the flow of gas throughout its pipeline system. That would supply it with a lot of incremental cash flow. In addition, it would earn a share of the profits from its retained interest in the export facility.
The potential for powerful total returns
Energy Transfer's growth prospects are starting to perk back up. The company sees growing opportunities to invest capital in expanding its existing platform and extending its reach into new areas like carbon capture and LNG.
The company's increased growth investment should fuel accelerated cash-flow growth, giving Energy Transfer more power to increase its already high-yielding distribution. That growth and income combo could provide the company with the fuel to produce strong total returns in the coming years, making it a very attractive investment opportunity right now.
