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Energy Transfer: Good Earnings Results, Solid Growth Potential

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On Wednesday, May 4, 2022, midstream giant Energy Transfer (NYSE:ET) announced its first-quarter 2022 earnings results. This company has admittedly been much less liked than some of its peers recently largely due to some questionable decisions by its management in the aftermath of the 2020 lockdowns. The market certainly seemed to like these results though as the company’s units skyrocketed during the after-hours trading session, which unfortunately fizzled on both Thursday and Friday. Energy Transfer did deliver a reasonably strong report overall though as it beat both revenue and earnings estimates along with a guidance increase from management. Energy Transfer thus certainly continues the trend that we have been seeing lately of midstream companies delivering stellar first-quarter results. Admittedly, investors may be somewhat loathed to trust this company after 2020 but it does continue to look like a reasonably solid way to earn a 6.88% yield.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Energy Transfer’s first quarter 2022 earnings results:

  • Energy Transfer brought in total revenues of $20.491 billion in the first quarter of 2022. This represents a 20.57% increase over the $16.995 billion that the company reported in the prior-year quarter.
  • The company reported an operating income of $1.846 billion in the most recent quarter. This represents a substantial 54.63% decline over the $4.069 billion that the company reported in the year-ago quarter.
  • Energy Transfer transported an average of 15.098 trillion BTU of natural gas per day via its long-haul pipelines during the current quarter. This represents a substantial 58.03% increase over the 9.554 trillion BTU of natural gas per day that the company averaged in the year-ago quarter.
  • The company generated a distributable cash flow of $2.510 billion over the reporting period. This represents a substantial decline over the $4.242 billion that the firm reported in the equivalent quarter of last year.
  • Energy Transfer reported a net income of $1.487 billion in the first quarter of 2022. This represents a substantial 59.16% decline over the $3.641 billion that the company reported during the first quarter of 2021.

It seems quite certain that anyone reviewing these highlights will notice that with the notable exception of revenues, every other measure of financial performance declined dramatically. This is something that will likely be disheartening to many readers. However, there was a one-off event that benefited Energy Transfer during the first quarter of 2021. This would be Winter Storm Uri, which was an unparalleled blast of cold weather that was severe enough to freeze pipelines and wind turbines even in Texas. This spiked the price of gas transportation through the few operating pipelines and provided a substantial cash flow boost to those few companies that were able to keep their pipelines operational during this storm. Energy Transfer was one of the companies that were able to benefit in this way. However, a cold-weather event that severe is a one-in-a-century event so it is highly unlikely that one will occur again during our lifetimes. As such, we should ignore the positive impact here when analyzing Energy Transfer’s year-over-year performance. If we do that, adjusted EBITDA and distributable cash flow would have both been higher in 2022 than in 2021. Presumably, the same is also true of operating income, although management has not stated that.

Another major thing that we see in the highlights is that Energy Transfer’s natural gas transported volumes increased substantially year-over-year, much more than other peer companies’ over the same period. This was not unexpected because it was caused by the acquisition of Enable Midstream, a deal that was consummated in December 2021. It should be very obvious why this would lead to a volume increase. After all, Energy Transfer did not own Enable’s assets during the first quarter of last year so the resources that they carried could not have contributed to the company’s results.

As investors, we are much more interested in the company’s forward prospects rather than how well it performed in the past. Fortunately, Energy Transfer looks positioned to improve its performance over the remainder of the year. This is because it brought online some of its growth projects during the quarter. Perhaps the most notable of these is the final phase of the long-running and somewhat troubled Mariner East Pipeline. This is a system of three pipelines that runs from Ohio to the Marcus Hook terminal south of Philadelphia:

Mariner East Pipeline Project

Farm and Dairy

The pipeline system took much longer to complete than expected to facing numerous lawsuits in both Pennsylvania and Ohio, although Energy Transfer was ultimately able to prevail and complete the project. Now that the final phase has been completed, the volume of natural gas liquids that the company can carry through the system has been increased to 365,000 barrels of natural gas liquids per day. As the final phase of the project was completed during the quarter, it was not able to make its full contribution to the company’s results. We should thus see slight volume and cash flow growth during the second quarter of this year from this accomplishment.

Energy Transfer also has some more long-term growth projects. During the quarter, the company started work on the Gulf Run Pipeline Project. This is one of the company’s midstream projects that is meant to support the emerging liquefied natural gas industry, which I have written about in a few recent projects. The Gulf Run Pipeline will be a 135-mile 42″ pipeline running from one of Energy Transfer’s natural gas mainline pipelines (Line CP) to southern Louisiana:

Gulf Run Pipeline Map

Energy Transfer

The purpose of the pipeline is to carry a maximum of 1.65 billion cubic feet per day to supply Golden Pass LNG, which is a natural gas liquefaction plant that is being constructed by Exxon Mobil (XOM) and Qatar Petroleum. As might be expected, Golden Pass LNG has already contracted to transport 1.1 billion cubic feet of natural gas per day through the pipeline. This is nice to see because it ensures that Energy Transfer is not paying an enormous amount of money to construct a pipeline that nobody wants to use. However, we can also see that the existing contract is not for the entire capacity of the pipeline so it will not be generating anywhere close to its maximum possible cash flows without additional contracts, although it will still be profitable. This may be a good decision by Energy Transfer, however. The area that this pipeline is in is a fairly attractive one for the placement of liquefaction plants and there are actually a few others reasonably close by. Thus, it is possible that somewhat will want to construct a new plant or expand an existing one in the area. It is even possible that Golden Pass LNG itself will wish to expand its operations. As I discussed in a recent article, the global demand for liquefied natural gas, primarily driven by Asia, is expected to grow by 40% by the end of the decade:

Asian LNG Growth 2021 to 2026

Golar LNG

As this trend plays out, it is very likely that the producers of liquefied natural gas will require more feedstock in the form of natural gas to produce their product. The fact then that Energy Transfer is positioned to supply growing amounts of gas in the future gives it long-term growth potential. Of course, this pipeline will also directly contribute incremental cash flow to Energy Transfer’s figures, which is expected to be around the end of this year. Thus, we can expect this pipeline to provide a boost to Energy Transfer’s financial figures as we enter the new year.

One of the nicest things about Energy Transfer has always been the company’s incredibly strong balance sheet and very reasonable debt load. We can see this by looking at the company’s leverage ratio, which is also known as the debt-to-adjusted EBITDA ratio. This is a ratio that is typically used by lenders to judge a company’s ability to carry its debt as it essentially tells us how long it would take the company to completely pay off its debt if it were to devote all of its pre-tax cash flow to that task. As of the close of the first quarter, this ratio stood at 3.55x, which is very reasonable. In fact, this is one of the best ratios in the industry. Analysts generally consider anything below 5.0x to be reasonable. I like to see this ratio below 4.0x though because a lower ratio improves the company’s ability to carry its debt in the event of a decline in cash flow. A midstream company like Energy Transfer tends to have remarkably stable cash flows but more safety is always better.

One of the biggest reasons why people invest in Energy Transfer is because of the remarkably high distribution yield that it boasts. As of the time of writing, Energy Transfer’s units yield 6.88%, which is obviously nice in today’s low-interest-rate environment. The company’s distribution is also one of the reasons why investors dislike it, as the partnership slashed its distribution severely in response to the events of 2020 and, although it has started to increase it, the distribution is still far below its previous level:

ET Stock Dividend History

Seeking Alpha

Despite the company’s past though, a new investor purchasing the units today will receive the current distribution and is not hurt by its past actions. As such, we want to investigate the company’s ability to maintain the distribution at the current level. After all, we do not want to be the victims of another distribution cut. The usual way that we do this is by looking at the partnership’s distributable cash flow, which is a non-GAAP ratio that theoretically tells us the amount of cash that was generated by the company’s ordinary operations and is available for distribution to the limited partners. As stated in the introduction, Energy Transfer generated a distributable cash flow of $2.510 billion in the first quarter of 2022. This was sufficient to cover the distribution that was actually paid out 3.36x over. Analysts generally consider anything above 1.20x to be reasonable and sustainable so Energy Transfer easily appears to meet this requirement. With that said though, the company’s ratio was above 2.0x prior to the 2020 distribution cut so anything may ultimately be possible.

In conclusion, there is a lot to like about Energy Transfer’s first quarter 2022 performance. The company’s numbers may at first not look as good but the company benefited from a non-repeatable event last year so that must be considered. The company also completed a project that should result in some growth next quarter and still boasts the attractive long-term potential to continue it. Finally, Energy Transfer’s rock-solid balance sheet and well-covered distribution position it very well to be a core holding of any income investor.

Read More: Energy Transfer: Good Earnings Results, Solid Growth Potential

2022-05-08 02:00:00

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