Energy Transfer (ET +1.02%) has come a long way over the past few years. The master limited partnership (MLP) has worked hard to shore up its financial position. That included slashing its distribution in half a few years ago to retain additional cash for debt reduction.
The energy midstream company has since rebuilt its distribution, which is now higher than its prior peak. That bigger payout, which currently yields 8.7%, is on an extremely firm foundation. That was one of the key takeaways from the MLP's recent fourth-quarter earnings conference call.
NYSE: ET
Key Data Points
Energy Transfer's best financial shape in years
On the call, Energy Transfer's co-CEO and CFO, Tom Long, discussed the company's much-improved financial situation. He commented, "As a result of our continued emphasis on strengthening our balance sheet, we are in the strongest financial position in Energy Transfer history."
Long highlighted that the company made meaningful progress last year to continue shoring up its financial foundation by using excess cash to repay debt. As a result, the MLP enters this year expecting its leverage ratio to be in the lower half of its 4.0-4.5 times target range. This improvement has drawn praise from credit agencies Fitch and S&P Global, which have upgraded its bond rating to BBB.
The company's higher credit rating makes it easier to access lower-cost capital. It capitalized on that earlier this year by issuing $3 billion of senior notes due in 2034 and 2054, with yields of 5.55% and 5.95%, respectively. It also issued $800 million of junior notes due in 2054 that yield 8%.
Energy Transfer used that capital to refinance existing debt and repurchase three series of its preferred units. Redeeming the preferred units will help simplify its capital structure and save it some money.
The flexibility to create more value for investors
Long noted that the company's financial strength "will allow us the flexibility to balance pursuing new growth opportunities with further leverage reduction, maintaining our targeted distribution growth rate and increasing equity returns to our unit holders." The company has already set a goal of increasing its high-yielding distribution by 3% to 5% per year. On top of that, it has the financial capacity to pursue new growth opportunities (acquisitions and organic investments) while returning additional cash to investors, which should increase its valuation.
It has accomplished all three over the past year. As noted, it has already started buying back some of its preferred units. Meanwhile, the company closed two acquisitions last year. It has also approved new expansion projects, including the $1.25 billion expansion of its Nederland terminal.
The MLP is in an excellent position to continue growing its operations and enhancing value for investors. While it hasn't launched a common unit repurchase program, it has the financial flexibility to buy back some of that equity this year.
Meanwhile, it has excess cash flows to easily support up to $3 billion of annual growth capital spending. It plans to invest $2.3 billion-$2.6 billion this year, allowing it to add additional growth projects as opportunities emerge. It currently has several exciting projects under development that could drive future growth.
On top of all that, Energy Transfer has the balance sheet strength to continue consolidating the midstream sector. It made two notable deals last year, buying Lotus Midstream for about $1.5 billion and acquiring fellow MLP Crestwood Equity Partners in a $7.1 billion deal. The company structured those leverage-neutral transactions to maintain optimal balance sheet flexibility.
Future deals will enable the company to capture cost savings (it expects to realize $80 million in cost savings from the Crestwood deal) and grow its cash flow, giving it more money to increase value for investors.
An increasingly safe income stock
Energy Transfer has significantly enhanced its financial foundation over the past few years. This means the company's big-time payout is safer than ever. That makes the MLP a great option for those seeking a sustainable, steadily rising income stream.
