Energy Transfer(NYSE: ET) has a long history as a consolidator in the midstream sector. That strategy is paying big dividends this year. The pipeline company recently reported strong first-quarter results, fueled mainly by recent acquisitions.
Another acquisition, this time by affiliate Sunoco(NYSE: SUN), will help power stronger-than-expected earnings growth for the master limited partnership (MLP) this year. The company's rising cash flow should give it the fuel to continue growing its high-yielding distribution.
Acquisition-fueled volume and earnings growth
Energy Transfer generated nearly $3.9 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the first quarter. That's a 13.1% increase compared to the year-ago period.
Meanwhile, it produced almost $2.4 billion of distributable cash flow, a 17.4% year-over-year surge. That was enough cash to cover the company's 7.8%-yielding distribution with $1.3 billion to spare. It used that retained cash to fund expansion projects ($461 million in the quarter) and strengthen its already solid balance sheet.
Acquisitions were the main catalyst fueling the MLP's growth. It closed its $1.5 billion Lotus Midstream acquisition last May and wrapped up its $7.1 billion merger with fellow MLP Crestwood Equity Partners in November. The company also completed construction on its Bear Processing Plant in June, Frac VIII in August, and the Trunkline Pipeline backhaul project in this year's first quarter.
These new investments and healthy market conditions fueled robust volume growth across the company's operations. Crude oil transportation volumes rocketed 44% in the quarter to a new partnership record. The MLP also grew its crude oil terminal volumes (10%), NGL fractionation volumes (11%), NGL exports (6%), NGL transportation volumes (5%), interstate natural gas transportation volumes (5%), and midstream gathered volumes (1%).
Set up for a strongyear
Acquisitions will continue to drive the company's growth this year. In addition to the continued uplift from Lotus and Crestwood, Energy Transfer will benefit from Sunoco's recently closed acquisition of NuStar. Energy Transfer is the general partner, incentive distribution rights holder, and 21% owner of Sunoco. Because of that, Sunoco's needle-moving acquisition of NuStar will trickle down to Energy Transfer.
The MLP will record its portion of Sunoco's higher earnings in its financial results. In addition, it will receive more cash distributions following Sunoco's recent decision to raise its payout by 4%.
That deal should push Energy Transfer's adjusted EBITDA to $15 billion-$15.3 billion this year. That's up from its previous range of $14.5 billion-$14.8 billion. It implies a 9.5%-11.7% increase from last year's level.
Energy Transfer also enhanced its future growth prospects in the quarter. The company recently approved several organic expansion projects, including:
- Building eight 10-megawatt natural gas power-generating facilities to support its operations in Texas. These plants will enter service in 2025 and 2026.
- Two projects to de-bottleneck its NGL pipelines from the Permian Basin to Mont Belvieu.
- Convert its recently acquired Sabina 2 pipeline to provide natural gasoline service between its Mont Belvieu NGL Complex and Nederland Terminal.
As a result of adding these projects, Energy Transfer expects its growth capital spending to be about $2.9 billion in 2024. That's up from its initial range of $2.4 billion-$2.6 billion.
The company's growth initiatives continue to drive its view that it can increase its distribution by 3% to 5% per year. It recently declared its latest payout, representing a 3.3% increase from the prior year's level.
Strong total return potential
Energy Transfer expects to deliver strong earnings and cash flow growth this year, fueled by its consolidation strategy. It also enhanced its organic growth outlook by adding several more expansion projects to its backlog. These catalysts should enable the MLP to continue increasing its distribution. Add its growth to its high yield, and Energy Transfer could have the fuel to produce strong total returns in the coming years.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
