Energy Transfer stock should be in every retirement portfolio (NYSE:ET)
Transfer of energy LP (NYSE: AND) continues to see its share price struggle to generate substantial returns for shareholders. The company currently trades at a market capitalization of $35 billion with an enterprise value of just under $85 billion. However, as we will see throughout this article, the company’s cash flow potential means it should be part of any portfolio.
Energy transfer 2Q 2022 results
Energy Transfer delivered incredibly strong results during the quarter.
Energy Transfer had an incredibly strong Q2 2022. The company is constructing two new cryogenic processing plants and organizing an operating season for the Gulf Run Pipeline project. The company reported strong volumes across its entire asset chain, supporting the strength of its business.
On the financial side, the company raised its adjusted EBITDA guidance to a midpoint of $12.7 billion, an increase of several percent from its previous guidance. The company’s annualized discounted cash flow (“DCF”) is approximately $7.6 billion. The company maintains a dividend of over 8%, with $4.8 billion in DCF after distributions.
The company’s growth capital is approximately $500 million per quarter, utilizing approximately 40% of this DCF. The company acquired Woodford Express as part of a complementary acquisition and continues to increase volumes and strategic opportunities at all levels.
Transfer of energy Continuous capital growth
The company continued to pursue modest capital growth, with an emphasis on opportunistic growth.
The company makes opportunistic acquisitions and acquired the Woodford Express for nearly $500 million. The asset fitted in incredibly well with the company’s existing asset portfolio and garnered 200 miles of new collection lines. The acquisition is immediately accretive for DCF, supporting additional cash flow.
The company’s $2 billion capital program is expected to generate 6x EBITDA. This represents approximately $350 million in new EBITDA or a 2-3% increase in EBITDA over capital expenditure. This can easily be added to the company’s annual shareholder rewards program. The company’s integrated portfolio of assets means that there is substantial high yield opportunity from capital growth.
The company has a long focus on capital spending and we expect it to maintain substantial capital spending going forward.
Financial positioning of energy transfer
Financially, the company is incredibly well positioned, although it has room to continue to reduce its debt.
The company has long-term debt of $48 billion after the last quarter. For this, the company spends just over $2.2 billion in interest, which means a return of around 4.5%. As the company increasingly has to roll over the substantial yield of its debt, with the FED raising interest rates, we expect these interest charges to increase.
The company’s interest is manageable, as shown by the company’s $7.6 billion annualized DCF, however, that $600 million in quarterly interest accounts for a large portion of the gap between Adjusted EBITDA and the $1.3 billion DCF. We would like the company to focus on aggressively buying up debt, but the company still seems reluctant to do so.
Transfer of energy Potential return for shareholders
Energy Transfer has the ability to generate substantial returns for shareholders, but ultimately it depends on how the company spends its capital.
The company generates $7.6 billion in annualized DCF. From there, it spends $2.8 billion on dividends. This leaves the remaining DCF at $4.8 billion. The company’s DCF return is over 20% and that’s not counting the extra billions that are being spent on interest expense with the company’s nearly $50 billion in debt.
The company also spends $2 billion per year on growth. This will add several hundred million dollars to adjusted EBITDA each year. That leaves the company $2.8 billion to spend however it wants. We would like to see consistent debt repayment at least toward a $30 billion debt level to preserve the company’s overall financial position.
Regardless of how the company spends its money, we expect substantial returns, however, we would like to see the company start with share buybacks. The company has indicated some potential interest in share buybacks, but it is keeping the levels low. However, we recommend that you pay close attention to how the company spends its money.
The greatest risk for energy transfer is more esoteric. Unlike ordinary upstream producers whose fields have a 2-3 year decline rate, Energy Transfer builds assets with a multi-decade timeline. This means that if volumes decline in a weak market, the company’s assets and cash flow could lose value. This significantly hurts its value and future returns.
Energy Transfer has an impressive asset portfolio. The company has accumulated this with a large debt, which is still around 48 billion dollars. The company has shown little interest in paying off its debt, but at the same time the interest is more than manageable for the company. This may change as interest rates rise.
The company’s 8% dividend alone makes the company a valuable investment on its own given its potential growth potential. The company is slowly buying back shares and continuing to spend billions on growth. The company also has several billion more dollars that it has not been guided to. Regardless of how the money is spent, we expect strong returns for shareholders.