Energy Transfer (NYSE:ET) was tipped as the potential energy trade of the decade this August, and a reiterated BUY rating followed. The company unveiled decent Q3 earnings and auspicious signs that suggest it remains one of the best bets in the energy sector moving forward.
Understanding The Energy Market Revamp
Energy Transfer’s Q3 earnings showed a 9.6% Y/Y decrease in revenues to $20.74 billion, yet trumped estimates by $350 million. Notably, adjusted EBITDA surged from $3.09 billion to $3.54 billion in Q3. With this robust growth in mind, the company appears poised to outstrip future expectations, propelled by several growth triggers.
Digging into the report reveals record-breaking transportation volumes in recent months for Energy Transfer. NGL transport volumes soared 14% to 2.2 MMbpd, while fractioned volumes jumped 9% to 1 MMbpd. Furthermore, international demand sparked a 20% surge in NGL export volumes in Q3, propelling Energy Transfer to represent close to 40% of all U.S. NGL exports. The company is expected to further boost its market share upon the completion of the Nederland export terminal expansion in 2025. Meanwhile, the midstream segment saw a 4% increase in gathered gas volumes to 19.8 million MMBtu/day.
The escalation in volumes is unlikely to see a price drop soon due to the constrained natural gas market. Given the ongoing market upheaval driven by Russia’s conflicts and the resultant reshuffling of energy supplies and demand, the strong conditions favor continued prosperity for Energy Transfer’s midstream business.
Fueling Further Growth
In this environment, Energy Transfer’s strategic move to acquire competitors for synergy realization and expansion makes strategic sense. The recent completion of the acquisition of Crestwood Equity Partners has paved the way for Energy Transfer to establish a foothold in the Powder River Basin, expand its downstream assets, and realize an estimated $40 million in annual synergies.
Moreover, the prior acquisition of Lotus Midstream is already reaping dividends, evidenced by a 23% surge in crude transportation volumes to 5.6 MMbpd in Q3. Further, with the U.S. emerging as the largest crude oil producer and production surpassing pre-pandemic levels at over 13 MMbpd, sustained high transportation volumes seem assured. Thus, the 2023 acquisitions are set to provide a substantial impetus to the company’s performance in the foreseeable future.
Is Energy Transfer Still A ‘BUY’?
Assessing Energy Transfer’s financial standing and its substantial debt burden, the situation seems firmly in control. Despite closing Q3 with $47.01 billion in long-term debt and around $2.12 billion in liquidity, the improving leverage ratio indicates a healthy state. The company anticipates a leverage ratio of about 4x to 4.5x down the line, consistent with comparable midstream companies. Coupled with a credit rating uptick from S&P to BBB with a stable outlook, Energy Transfer’s ability to issue $4 billion in senior notes further underscores its sound financial position.
The favorable macros, as highlighted earlier, cast a positive outlook, with distributable cash flow to partners in Q3 at $1.99 billion, up from $1.58 billion a year ago. With stellar macro environment and soaring transportation volumes, Energy Transfer is primed for elevated adjusted EBITDA and prospective increased investor payouts in the upcoming year.
Understanding The Risks
Risks loom, primarily tied to the potential downturn in macro conditions leading to reduced economic activity and waning energy demand, subsequently impacting transportation volumes. The ability of Energy Transfer to complete its Lake Charles LNG export facility on time presents another risk, especially given the recent uncertainty and the projected surge in global LNG supply.
While the ongoing energy market transformation bodes well for Energy Transfer, prudent investors should navigate the risks amid the company’s resilient business model and growth drivers.