Energy Transfer (ET +0.10%) has grown into a behemoth in the energy midstream sector. The pipeline company is an active acquirer and developer of midstream assets. That expansion has enabled the master limited partnership (MLP) to pay a sizable distribution (currently yielding 9.2%) that it aims to increase over time.
The MLP currently has a decent expansion project backlog, with plans to invest a little less than $2 billion on growth capital projects this year. It has already secured a few projects for 2024 and beyond and has even more growth opportunities in the pipeline. That could give it the fuel to continue growing its cash flow and distribution in the coming years.
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Building on its legacy positions
Growth was a key topic of conversation on Energy Transfer's third-quarter conference call. Co-CEO Tom Long discussed several of the projects the company has in the pipeline, noting, "We continue to evaluate a number of other potential growth projects that we hope to bring to FID [Final Investment Decision]. ... As we look forward to our potential backlog of high-returning growth projects, we continue to expect our long-term annual growth capital run rate to be approximately $2 billion to $3 billion."
The company is working on several projects to expand its existing operations. For example, Long noted it's pursuing an optimization project at its Marcus Hook terminal that would add additional ethane refrigeration and storage capacity. It's also contemplating adding another natural gas processing plant in the Permian Basin.
In addition to those relatively small projects, Energy Transfer continues to work on its Lake Charles LNG project to convert a legacy natural gas import terminal into a liquefied natural gas (LNG) export facility. Long provided an update on the call, stating:
We continue to see significant interest in our LNG capacity from U.S. producers and international markets. We are in negotiations with several significant equity partners and are ultimately targeting retaining an interest of approximately 20% for Energy Transfer. These potential equity partners are also interested in substantial volumes of LNG offtake.
As the co-CEO noted, the company is working to secure partners who would acquire a meaningful stake in the facility to help fund its development, many of whom will also be customers. This project would move the needle for the company. It would generate meaningful cash flows from its retained 20% interest. The project would also increase the earnings from its gas pipelines as higher volumes flow into Lake Charles.
The company is awaiting the approval of an export permit from the Department of Energy, which is crucial to moving forward. It hopes to make an FID in the coming months and start construction early next year.
Expanding into new areas
Most of Energy Transfer's current investment focus is on expanding its existing operations to support the continued growth in fossil fuel demand. However, the company is also working on projects geared toward lower-carbon fuels. Long noted that the company has already approved a small carbon capture and sequestration (CCS) project with Capture Point that is progressing nicely.
In addition, it's working with Occidental Petroleum on a CCS project in the Lake Charles area. The CFO commented, "This would include the construction of a CO2 pipeline connecting our industrial facilities to Oxy's proposed sequestration site." It's also working on CCS projects related to its processing plants and treating facilities in Texas and evaluating other carbon dioxide pipeline projects to connect emitters to sequestration sites near Houston.
"On the blue ammonia front," Long stated, "we are working with several companies to evaluate the feasibility of ammonia projects that would include significant natural gas supply opportunities, deepwater dock access, and other infrastructure services on existing Energy Transfer property near our Lake Charles and Nederland facilities."
Blue ammonia is a potential low-carbon fuel (through CCS) that could help decarbonize industries like heavy road transport and shipping. The potential blue ammonia projects would enable Energy Transfer to deliver higher gas volumes across its existing pipelines while expanding its export and CCS businesses, boosting its long-term cash flows.
Finally, Long noted that the company is evaluating using some of its existing 250,000 acres of land in Virginia, West Virginia, and Kentucky for solar, wind, forestry, and carbon credits. The potential use of this land could enable the company to generate incremental income while reducing emissions.
Aiming to keep its growth engine well fueled
Energy Transfer's capital spending is currently trending below the low end of its $2 billion to $3 billion annual range. However, it's pursuing several compelling investment opportunities. The company's extensive project pipeline enhances its confidence that it can deliver on its plan to grow its 9.2%-yielding distribution by 3% to 5% per year. That high income level and solid growth rate could give the MLP the fuel to produce total annual returns in the mid-teens in the coming years.
