Energy Transfer LP (ET) is a midstream energy company with an extensive network of assets providing services across the natural gas, crude oil, and NGL value chain.
With its diversified services, steady cash flows, and growth opportunities, ET offers investors a compelling combination of stability and income along with upside potential.
A Diversified Midstream Company With Scale
Founded in 1995 and headquartered in Dallas, Texas, ET has grown to become one of the largest midstream energy companies in the US. The company owns and operates over 118,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines spread across 38 states.
Additionally, ET has a storage capacity of over 260 million barrels for NGL and refined products and also owns 27 processing facilities. The company’s extensive infrastructure network provides it with significant scale and diversification across services and geographies.
This widespread presence helps ensure stable utilization rates across market cycles, providing resilient cash flows. For example, ET generated $11 billion in adjusted EBITDA in 2022, approximately 90% of which was from fixed-fee and take-or-pay contracted assets.
Defensive Attributes Offer Reliable Income
A key aspect that makes ET an attractive investment is the essential nature of its infrastructure assets and the stability it lends to cash flows.
As a pipeline operator, ET earns fixed monthly capacity payments from its customers based on volume commitments, irrespective of commodity price fluctuations.
Take-or-pay contracts, where customers pay for capacity reservation whether used or not, further bolster cash flow reliability.
The defensive nature of its cash flows was evident during the pandemic, when ET managed to grow adjusted EBITDA by 2% in 2020 while energy demand cratered. Furthermore, around 85% of ET’s pipeline contracts are with investment-grade customers, minimizing counterparty risks.
ET recently increased its quarterly distribution to $0.305 per unit, resulting in an eye-catching distribution yield of 9.3%. With a distribution coverage ratio of 1.9x, the payout looks safe and leaves room for distribution growth as well.
For income investors, ET offers an attractive high yield supported by stable cash flows.
Deleveraging Efforts Strengthen the Balance Sheet
While ET’s high leverage has been a concern in the past, the company has made significant strides in reducing debt and strengthening its balance sheet recently.
Total debt has declined from $51.41 billion at the end of 2020 to $47 billion currently. Management has stated a plan to reduce leverage to 4.0-4.5x from 4.6x now and bring it within its target range of 4.0-4.25x.
These deleveraging actions helped ET regain its investment grade credit rating of BBB- from S&P and Baa3 from Moody’s after being relegated to junk status in April 2020.
In December 2022, S&P upgraded ET one notch further to BBB, citing improving leverage metrics. A stronger balance sheet provides ET with greater financial flexibility to fund growth projects.
Accretive Acquisitions and Organic Investments Drive Growth
While ET generates stable cash flows from existing assets currently, the company also has significant opportunities to grow in coming years. Management estimates project backlog of around $4 billion that will help drive expansion.
Recent acquisitions have also added to growth with the $3.58 billion buyout of Enable Midstream in 2021 that expanded ET’s natural gas business.
The company is also constructing the Mariner East pipeline system that will transport NGLs from the Marcellus region to markets along the US East Coast and expects it to enter service in 2023.
These organic investments and strategic acquisitions are expected to drive 6-8% annual EBITDA growth through 2024, providing visibility into ET’s future expansion. Continued capital investments will help ET increase utilization of its existing infrastructure while meeting growing energy demand.
Valuation Looks Attractive Despite Recent Gains
ET units have gained 25% over the past year, outperforming the S&P 500 index. However, at the current unit price of $12.5 and enterprise value of $87 billion, ET is trading at an EV/EBITDA multiple of just 8x based on estimated 2023 EBITDA.
This valuation looks cheap compared to its 5-year average multiple of over 10x and also relative to midstream peers that trade closer to 10-12x EV/EBITDA. The discounted valuation likely reflects ET’s high leverage historically, but the improving debt profile makes the low multiple appealing.
With a high yield supported by resilient cash flows, a stronger balance sheet, growth opportunities, and an inexpensive valuation, ET offers a compelling risk-reward proposition for investors. The units appear capable of delivering double-digit total returns over the next few years.
A Defensive Pick For Income and Upside
In summary, with its diversified midstream asset base that provides stable utilization and cash flows, ET makes for a relatively low-risk energy infrastructure investment. The high distribution yield offers substantial income, which looks sustainable given strong distribution coverage.
Deleveraging initiatives have strengthened the balance sheet and improved ET’s credit profile. Accretive acquisitions and organic growth provide visibility into continued EBITDA expansion over the next few years. And the undemanding valuation sets the stage for capital appreciation.
For income investors looking for current yield along with upside potential, ET checks all the boxes. The company’s defensive attributes also make it a solid pick amidst economic uncertainty, providing portfolio stability. ET appears positioned to deliver attractive total returns for investors going forward.