Energy Transfer (ET -1.12%) has had its ups and downs over the years. Like many companies, it found itself in a tight spot when the pandemic hit in 2020. That event forced the master limited partnership (MLP) to slash its distribution in half so that it could retain additional cash to strengthen its balance sheet. While that payout cut was a bitter pill for investors to swallow at the time, it has paid big dividends over the past few years.
The MLP has significantly strengthened its financial foundation to the point where it's now stronger than ever. That enabled Energy Transfer to steadily increase its distribution, which is now above its pre-pandemic level. The payout, which currently yields nearly 8%, is safer than ever.
TXSE: ET
Key Data Points
From tight to tremendous flexibility
Energy Transfer's management team discussed its current financial position on the first-quarter conference call. Co-CEO and CFO Tom Long proclaimed, "Our financial position continues to be stronger than at any time in Energy Transfer's history." That drives the MLP's belief that it "will provide us with the continued flexibility to balance pursuing new growth opportunities, further leverage reduction, maintaining our targeted distribution growth rate, and increasing equity returns to our unitholders."
The company's leverage ratio has dramatically improved over the past few years. It expects leverage to be toward the lower half of its 4.0-4.5 times target range this year. Because of that, it has gone from being on the precipice of seeing its credit rating downgraded into junk bond territory to a recent upgrade to BBB, pushing its credit further up the investment-grade ladder.
It's also retaining significant cash after paying its massive and growing distribution. It produced $2.4 billion in distributable cash flow during the first quarter and $1.3 billion of excess cash after covering its distribution (which has grown by 3.3% over the past year). That easily gave it enough cash to fund its expansion projects ($461 million in the first quarter) and enhance its balance sheet.
The flexibility to grow its business and shareholder returns
Long noted that Energy Transfer's strong financial flexibility allows it to pursue new growth opportunities even as it continues to return more cash to investors. It has used some of its additional financial capacity to approve new expansion projects. It recently sanctioned new de-bottlenecking projects on its Lone Star Express and Gateway NGL pipelines, the conversion of Sabine 2, and several new power generation facilities. As a result, it increased its capital spending range to between $2.8 billion and $3 billion this year, putting it near the top of its long-term target range of $2 billion to $3 billion.
Even though it's already at the high end, Energy Transfer still has ample financial flexibility to approve additional expansion projects this year. The MLP has several potentially large projects under development that it can sanction once it has sufficient commercial support from customers. Most of its current projects are shorter-term expansions that will start adding to its cash flow in the coming quarters.
In addition, the company has the ability to make acquisitions as opportunities arise. It closed two major deals last year, which enhanced its free cash flow without negatively impacting its balance sheet. The company is always on the lookout for a deal that would add value to its system and allow it to capture commercial and cost synergies.
Energy Transfer's strong financial flexibility enables it to continue investing in its growth while returning more cash to investors. The MLP aims to increase its distribution each quarter by around a 3% to 5% annual rate. It also wants to start returning additional cash to investors by repurchasing its units. It plans to be opportunistic, especially as its leverage ratio continues to fall.
A rock-solid income stock
Energy Transfer is in a great place these days. It's in its best financial position ever, which puts its big-time payout on rock-solid ground. It has the flexibility to grow its business and cash returns to investors. Because of that, it's an ideal option for those seeking an attractive and steadily rising income stream (and are comfortable investing in MLPs, which send a Schedule K-1 each year at tax time, which requires some extra work when filing taxes).
