8.9%-Yield Energy Transfer LP Stock Has 29% Upside
January 19, 2024
Why ET Stock’s Price Has Risen (& Could Keep Rising)
Oil prices can certainly be volatile. In 2020, in the opening days of the COVID-19 pandemic, the price of a barrel of oil cratered to virtually nothing. Then, in early 2022, crude oil closed in on $130.00 per barrel. Fast-forward to January 2024, and West Texas Intermediate (WTI) oil is trading around $71.00 per barrel.
Depending on who you listen to, by the end of 2025, the price of WTI oil could range from $74.35 to $102.00 per barrel. (Source: “Oil Analysis and Price Forecast 2024: Volatility Due to Geopolitical Tensions and Economic Uncertainties,” CAPEX, December 21, 2023.)
When it comes to oil and natural gas, it’s difficult to truly predict the market, since there are so many factors that could unexpectedly affect energy prices. For investors who like the idea of energy stocks but want to avoid much of the volatility, it might make sense to look at midstream energy companies like Energy Transfer LP (NYSE:ET).
Midstream energy companies process, store, transport, and/or market oil, natural gas, and/or natural gas liquids (NGL). They operate infrastructure such as pipelines, gathering facilities, and transmission facilities. They’re basically the toll collectors of the oil and gas industry, charging fees to move oil and gas from wellheads to refineries.
Best of all, with most of the contracts, upstream energy companies need to pay midstream energy companies whether they use their infrastructure or not. And like all good toll collectors, midstream companies build inflation escalators into their contracts.
Many investors ignore this segment of the energy industry, focusing instead on the more exciting business of oil exploration. But if you’re ignoring midstream energy stocks, you’re missing out on some of the best income investments around.
Energy Transfer LP is a diversified midstream energy company that’s been running on all cylinders.
The partnership recently reported fabulous quarterly results, which included record-high NGL transportation and fractionation volumes and record-high crude oil transportation and terminal volumes. It also provided strong guidance for full-year 2023 and increased its distribution for the eighth consecutive quarter.
That helps explain why the price of Energy Transfer LP stock has surged over the past year.
About Energy Transfer LP
Energy Transfer is a Dallas, Texas-based midstream limited partnership that has a strategic footprint in all major U.S. oil and gas production basins. It has a fully integrated infrastructure portfolio that serves the domestic and international energy markets.
The company owns and operates more than 125,000 miles of pipelines and associated infrastructure in 44 states. To put that in perspective, its pipelines could circle the globe almost five times. (Source: “August 2023 Investor Fact Sheet,” Energy Transfer LP, last accessed January 15, 2024.)
Energy Transfer transports natural gas, petroleum, gasoline, diesel, jet fuel, propane, ethane, and butane. (Source: “Stats and Facts: Nov 2023,” Energy Transfer LP, last accessed January 15, 2024.)
The company transports a lot of it, including about 35% of the U.S.-produced crude oil and about 30% of the U.S.-produced natural gas. In 2022, it transported 4.3 million barrels of petroleum per day. That’s enough to fill 6.25 million cars with gasoline per day or fuel 8,026 three-hour flights on “737 Max” airline jets per day.
Energy Transfer LP exports more NGL than any other company or country, capturing approximately 20% of the world market. Furthermore, the company is the only logistics provider with export facilities on both the U.S. Gulf Coast and East Coast (i.e., Nederland Terminal, Houston Terminal, and Marcus Hook Terminal).
Acquisition of Crestwood Equity Partners LP
In November 2023, Energy Transfer completed its acquisition of Crestwood Equity Partners LP, an energy company that Income Investors has profiled numerous times, including in April 2023. (Source: “Energy Transfer Completes Acquisition of Crestwood,” Energy Transfer LP, November 3, 2023.)
Crestwood Equity Partners has gathering and processing assets in the Williston Basin, Delaware Basin, and Powder River Basin, including about 2.0 billion cubic feet per day of gas gathering capacity, 1.4 billion cubic feet per day of gas processing capacity, and 340,000 barrels per day of crude oil gathering capacity. (Source: “Energy Transfer to Acquire Crestwood in a $7.1 Billion All-Equity Transaction,” Energy Transfer LP, August 16, 2023.)
Crestwood Equity’s assets complement Energy Transfer’s downstream fractionation facility in Texas, Nederland Terminal in Texas, and Marcus Hook Terminal in Pennsylvania.
Energy Transfer LP expects the acquisition to also benefit its NGL & Refined Products segment and its Crude Oil segment. That’s because the company has gained strategically located assets, including about 10 million barrels worth of storage capacity, trucking terminals, and rail terminals.
The transaction, which was immediately accretive to distributable cash flow per unit for Energy Transfer, adds significant cash flow from firm and long-term contracts.
Great Third-Quarter 2023 Results
For the third quarter ended September 30, 2023, Energy Transfer reported net income of $584.0 million, or $0.15 per unit. (Source: “Energy Transfer Reports Third Quarter 2023 Results,” Energy Transfer LP, November 1, 2023.)
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $3.54 billion, versus $3.09 billion in the same prior-year period.
The partnership’s distributable cash flow (as adjusted) was $1.99 billion, compared to $1.58 billion in the same quarter of 2022.
During the third quarter of 2023, Energy Transfer LP’s volumes increased in most of its segments:
- Crude oil transportation volumes went up by 23%, setting a new record
- Crude oil terminal volumes went up by 15%, setting a new record
- NGL exports went up by more than 20%, setting a new record
- NGL transportation volumes went up by 14%, setting a new record
- NGL fractionation volumes went up by nine percent, setting a new record
- Interstate natural gas transportation volumes went up by 15%
- Intrastate natural gas transportation volumes went up by two percent
- Midstream gathered volumes went up by four percent
Management Increased Adjusted Earnings Guidance
For full-year 2023, Energy Transfer LP expects to report adjusted EBITDA in the range of $13.5 to $13.6 billion, including Crestwood Equity Partners LP’s consolidated operations from November and December. That estimate is up from the company’s previous guidance in the range of $13.1 to $13.4 billion.
Management estimates that its 2023 growth capital expenditures were slightly below its previously announced guidance of $2.0 billion.
The partnership also estimates that its 2023 maintenance capital expenditures, including those by Crestwood Equity Partners, were between $740.0 and $790.0 million.
Energy Transfer LP Hiked Payout for 8 Straight Quarters
Energy Transfer is a cash cow that provides its shareholders with reliable, growing, high-yield dividends. Management targets an annual distribution growth rate of three to five percent.
In November 2023, the company increased its quarterly cash dividend from $0.31 to $0.3125 per unit. (Source: “Distribution History,” Energy Transfer LP, last accessed January 15, 2024.)
This works out to a yield of 8.94% (as of this writing).
That was the eighth consecutive increase to ET stock’s quarterly dividend, and it represents a 104.9% increase from its November 2021 distribution of $0.1525 per unit.
Chart courtesy of StockCharts.com
In addition to Energy Transfer LP stock’s growing, inflation-crushing quarterly dividends, investors can find comfort in its market-trumping share-price gains. As of this writing, ET stock is up by 15% over the last six months and 25% over the last year.
Those are big gains, and Wall Street analysts expect more double-digit growth. They’ve provided a 12-month average share-price estimate of $16.00 and a high share-price estimate of $18.00, for potential gains in the range of approximately 14.5% to 29%.
The Lowdown on Energy Transfer LP Stock
Investing is about finding opportunities, and ET stock is one of the best energy plays right now. Energy Transfer LP has a solid balance sheet, and it has been growing its infrastructure assets, most recently with its acquisition of Crestwood Equity Partners LP.
The outlook for Energy Transfer LP stock is robust, with the company benefiting from a portfolio of assets that’s exceptionally diverse in terms of product type and geography. The partnership’s multiple business segments generate balanced earnings, with no single segment being responsible for more than one-third of its consolidated adjusted EBITDA.
Moreover, the vast majority of Energy Transfer LP’s segment margins are fee-based, meaning the company is mostly protected from volatile commodity prices.
All that should help the partnership continue rewarding ET stockholders with reliable, growing, high-yield distributions and long-term capital appreciation.
