Energy Transfer (ET 0.12%) is coming off a strong year. The master limited partnership (MLP) delivered solid earnings growth, fueled by organic expansion and two acquisitions. That growth helped power a 16% increase in its unit price. Meanwhile, its big-time distribution pushed its total return to 28%.
Despite that solid showing last year, Energy Transfer remains a screaming bargain with one of the lowest valuations in its peer group. Add that to its high-yielding payout (currently 8.9%) and growth prospects, and the MLP could continue producing strong total returns in 2024 and beyond.
A bottom-of-the-barrel valuation
Energy Transfer is one of the biggest midstream companies in the country. It's also one of the cheapest:
Image source: Energy Transfer.
As the chart in the upper left-hand corner of that slide shows, the MLP trades at about 8 times its enterprise value to EBITDA. That's scraping the bottom of the barrel among its midstream peers even though it delivered the second-best performance in the sector last year.
There's no discernable reason for the discount. The MLP is growing its earnings and distribution. It also has a much-improved balance sheet, with a solid credit rating and a leverage ratio trending toward the lower end of its target range.
It also generates significant cash flow. Energy Transfer estimates it can produce about $7.5 billion in free cash annually. That easily covers its high-yielding cash distribution ($4 billion or about 53% of its cash flow). Because of that, it can retain the cash needed to fund growth capital projects ($2 billion to $3 billion per year) with at least $500 million to spare. That excess free cash gives it additional financial flexibility to further strengthen its balance sheet or repurchase its dirt cheap units.
Lots of growth still ahead
Energy Transfer delivered solid earnings growth last year as volume growth, organic expansions, and acquisitions helped offset lower commodity prices and one-time items from 2022. It has a lot of momentum to continue growing in 2024. Headwinds from those one-time items, rising interest rates, and slumping commodity prices should fade. Meanwhile, it will capture the full impact of last year's acquisitions, notably its $7.1 billion merger with Crestwood that didn't close until early November.
The company should also continue benefiting from its organic expansion project investments. Energy Transfer invested about $2 billion into growth projects last year, primarily high-return, short-cycle projects like expanding existing facilities and pipelines that should start generating cash in 2024.
Those two growth drivers fuel the MLP's view that it will be able to increase its already sizable distribution by 3% to 5% per year. It expects to give investors a slight raise each quarter this year.
Meanwhile, it should have plenty of fuel to continue growing its earnings and distribution beyond 2024. The MLP has a large pipeline of organic expansion projects under development. Potential future projects include more shorter-cycle expansions and larger-scale developments like its Lake Charles LNG project, and a carbon capture and sequestration joint venture with Occidental Petroleum.
The MLP also has ample financial flexibility to continue making acquisitions. Energy Transfer has long been a consolidator in the midstream sector. With industry consolidation picking up steam in recent months, seeing the MLP make another deal in the coming year wouldn't be a surprise. It typically targets transactions accretive to its distributable cash flow per unit, giving it more fuel to support its steadily rising distribution.
A compelling value proposition
Energy Transfer trades at one of the lowest valuations in the midstream sector despite its growth and solid balance sheet. That dirt cheap price is why the MLP offers such a high-yielding payout. With more growth ahead, Energy Transfer is a compelling option for investors seeking an income stock with strong total return potential.
