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Energy Transfer (NYSE: ET)
Q4 2023 Earnings Call
Feb 14, 2024, 4:30 p.m. ET

Summary:

• Prepared Remarks
• Questions and Answers
• Call Participants

CEO Sheds Light on Financial Performance and Growth Strategies

Operator

Good afternoon, and welcome to the Energy Transfer fourth quarter 2023 earnings conference call. All participants will be in listen-only mode. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Tom Long.

Please go ahead.

Tom Long — Co-Chief Executive Officer and Chief Financial Officer

Thank you, operator, and good afternoon, everyone! Welcome to the Energy Transfer fourth quarter 2023 earnings call. I’m also joined today by Mackie McCrea and other members of the senior management team who are here to help answer your questions after our prepared remarks. Hopefully, you saw the press release we issued earlier this afternoon as well as the slides posted to our website. As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

Impressive Financial Results

For the full year 2023, we generated adjusted EBITDA of $13.7 billion, which is up 5% over 2022 and is a partnership record. DCF attributable to the partners of Energy Transfer, as adjusted, was $2 billion compared to $1.9 billion for the fourth quarter of 2022. Operationally, we moved record volumes across all of our segments for the year ended 2023, which included record volumes on our legacy assets before including contributions from assets acquired in 2023.

On January 25, we announced a quarterly cash distribution of 31.5 cents per common unit or $1.26 on an annualized basis. This distribution represents an increase of 3.3% from 30.5 cents paid in the fourth quarter of 2022. Last year, Energy Transfer’s senior unsecured credit rating was upgraded by Standard & Poor’s to BBB with a stable outlook. Fitch has also upgraded Energy Transfer’s senior unsecured credit rating to BBB with a stable outlook. This continued third-party acknowledgment reiterates the emphasis we have placed on balancing growth while improving our balance sheet and reducing our leverage.

Strategic Financial Decisions

As of December 31, 2023, the total available liquidity under our revolving credit facilities was approximately $3.56 billion. During the fourth quarter of 2023, we spent approximately $380 million on organic growth capital. In January 2024, we issued $3 billion of aggregate principal amount of senior notes and $800 million of junior subordinated notes and used the proceeds to refinance existing indebtedness and for general partnership purposes. In addition, proceeds were used to redeem all of our outstanding Series C and Series D preferred units. We completed this redemption on February 9, and we expect to redeem all of our outstanding Series E preferred units by May of 2024.

Achievements Across Segments

For the NGL and refined products segment, in 2023, we loaded more than 61 million barrels of ethane out of Nederland and nearly 27 million barrels of ethane out of Marcus Hook. We continue to export more NGLs than any other company and maintained approximately 20% market share of worldwide NGL exports. In the midstream segment, adjusted EBITDA was $674 million compared to $632 million for the fourth quarter of 2022. We saw record throughput this quarter, primarily as a result of the addition of the Crestwood assets and higher volumes from existing customers in the Permian.

Simmons Energy Provides Promising Fourth Quarter Updates Highlighting Growth and Expansion

Simmons Energy recently released its fourth-quarter updates, which highlighted substantial volume growth in its South Texas and Mid-Continent regions. The company reported strong adjusted EBITDA across its various segments, showcasing significant potential for the future.

Volume Growth and Financial Performance

Simmons Energy witnessed a robust 5% increase in gathered gas volumes, reaching 20.3 million MMBtus per day. Additionally, the company’s adjusted EBITDA for the crude oil segment surged to $775 million, marking a substantial rise compared to the same period in the previous year.

Segment-wise Analysis

The company saw significant improvements in its crude oil transportation volumes, recording a remarkable 39% increase to a record 5.9 million barrels per day. Furthermore, Simmons Energy’s interstate segment reported a noteworthy rise in adjusted EBITDA, primarily attributed to the successful placement of the Gulf Run pipeline into service and higher contracted volumes across its pipelines.

Integration of Crestwood Equity Partners

Simmons Energy emphasized that the integration of Crestwood Equity Partners, completed in November 2023, has been proceeding exceptionally well. The acquisition is expected to yield approximately $80 million of annual cost synergies by 2026, bolstering the company’s operational capabilities and asset profitability.

Expansion Projects and Terminal Enhancements

The company is ambitiously pursuing growth projects, including the expansion of its NGL export capacity and the construction of new refrigerated storage at the Nederland terminal. Additionally, Simmons Energy has closed acquisitions of pipelines and initiated optimization projects at its Marcus Hook terminal, aiming to fortify its presence in the market and cater to increased demand.

Challenges and Continued Pursuits

Despite facing uncertainties related to the Biden administration’s moratorium on LNG export approvals, Simmons Energy remains resolute in its pursuit of the Lake Charles LNG project. The company expressed gratitude for the unwavering support of its LNG customers, aiming to navigate through the challenges and emerge successful in its endeavors.

Future Strategies and Collaborations

Simmons Energy remains committed to exploring new opportunities, including the evaluation of ammonia projects and the provision of additional infrastructure services. The company’s proactive approach towards diversification and collaboration signals its progressive stance in the evolving energy landscape.

Energy Transfer Addresses Pipeline Issue and 2024 Growth Plans Amidst Legal Ongoing

Energy Transfer has recently addressed concerns about its pipeline issue in Louisiana. The company asserted that it is simply seeking to protect its legal property rights under Louisiana law amidst allegations of unfair and anticompetitive practices. While addressing these concerns, the company also discussed its 2024 organic growth capital guidance, emphasizing the expected growth capital expenditures and adjusted EBITDA guidance.

Addressing the Pipeline Issue

Energy Transfer responded to the allegations of unfair and anticompetitive practices in the matter of pipeline crossings in Louisiana. The company explained that it is enforcing its property rights in response to requests from third parties seeking to secure long segments of proposed parallel pipes within their existing rights of way and workspaces, including numerous crossings.

The parties making these requests have, according to Energy Transfer, largely rejected or ignored the company’s requests for technical information regarding the crossings. Energy Transfer emphasized its commitment to operate its assets safely and reliably while asserting its efforts to protect its property rights under the law. The company refuted the allegations against it, stating that the statements of unfounded and false as these parties are seeking to build large-diameter pipe, high-pressure pipelines that could adversely affect existing lines and potentially put Energy Transfer at risk under its existing FERC certificate.

2024 Growth Plans and Guidance

Energy Transfer laid out its 2024 organic growth capital guidance, detailing the expected growth capital expenditures of between $2.4 billion and $2.6 billion, inclusive of a deferred amount from 2023. The company outlined the areas where the capital would be allocated, including expansions to export facilities, storage tanks, new pumping stations, new crude oil pipeline connections, and additional gathering and compression build-out among others. These projects are part of Energy Transfer’s efforts to pursue potential backlog of high-returning growth projects and maintain a long-term annual growth capital run rate of approximately $2 billion to $3 billion.

The company also provided its adjusted EBITDA guidance for 2024, expecting it to be between $14.5 billion and $14.8 billion. Energy Transfer cited its ability to provide stable cash flows and operate through various market cycles, expressing confidence in the strong utilization of assets within its core segments and the growth opportunities from recently acquired assets. It emphasized its commitment to meet the growing worldwide demand for crude oil, natural gas liquids, and refined products through strategic optimization and expansion projects.

Discussion and Q&A

The company also engaged in a discussion on the factors driving its guidance and growth projections, highlighting the potential impact of commodity prices and the producer activity in areas such as the Haynesville and the Permian Basin. Energy Transfer acknowledged the potential slowdown in producer activity if gas prices in North Louisiana were to decrease further but expressed optimism about growth in the Permian Basin and stability in other regions where its assets are located.

Following the presentation, the company opened the floor for a question-and-answer session where analysts inquired about various aspects of Energy Transfer’s operations and outlook.

The Future Outlook of a Leading Energy Company

Jeremy Tonet — JPMorgan Chase and Company — Analyst

It seems like kind of a conservative outlook and producer activity given where the strip is there. Maybe pivoting a little bit toward capital allocation.

Even with the capital program that you guys laid out as it is, it seems like is going to be a significant amount of surplus cash flow. What’s the, I guess, priority ranking for the capital allocation at that point?

Tom Long — Co-Chief Executive Officer and Chief Financial Officer

The main difference is that we have got to the lower side of our 4% to 4.5%. And like we said before, it wouldn’t even hurt to go a little bit lower if it gave us a little bit more dry powder to be able to continue to look at growth opportunities, etc.

We’re obviously very disciplined on our projects and how we approve them and get them to FIDs.

Jeremy Tonet — JPMorgan Chase and Company — Analyst

So, buybacks are not off the table at this point. Is that how to think about it?

Tom Long — Co-Chief Executive Officer and Chief Financial Officer

No, that’s exactly right. Absolutely. They definitely are on the table.

Our next question comes from Jean Ann Salisbury with Bernstein. Please go ahead.

Jean Ann Salisbury — AllianceBernstein — Analyst

Would it be possible to get a dash more detail on the projects and the capex budget for this year?

We can move quicker on that. It’s just adding compression, in some cases, treating [Inaudible]. We also have already done that in the Eagle Ford. We’ve already added about 50,000 or 60,000 a day at very low cost.

Jean Ann Salisbury — AllianceBernstein — Analyst

And as a follow-up, I believe that some of the original DAPL contracts roll this year, can you discuss if you’re blending and extending those?

As far as when contracts fall off and kind of what our approach is, I will answer it this way. We are very confident that we will keep our pipeline full and increase the volumes through time.

Keith Stanley — Wolfe Research — Analyst

How are you viewing the preferred stock right now over the next few years? And how do you kind of way using excess cash to repay that versus other uses?

Tom Long — Co-Chief Executive Officer and Chief Financial Officer

We’re actually very excited at the fact that we’re able to start bringing some of that back in as far as the perpetual preferred. It makes a lot of sense for us to continue to bring those back in. We’re going to continue to be opportunistic on those. When they make sense, economic sense, we’ll look.

The results of the latest forecast presented by the Co-Chief Executive Officer and Chief Financial Officer certainly give investors a lot to be optimistic about. There are positive signs in the company’s outlook, reflected in the discussion of surplus cash flow and the potential for buybacks. This dynamic approach to capital allocation certainly reflects the company’s commitment to prudent financial management. Furthermore, the clear emphasis on discipline in project approval and evaluation presents a level-headed perspective.

With discussions around projects, capex budgets, and contract renewals, the company appears to be strategically positioning itself for long-term success in the energy market. The insightful responses from the executives provided investors with a comprehensive view of the company’s future plans. All in all, this exchange provides a reassuring glimpse into the strategy and vision of the leadership within the company.

Energy Transfer: Navigating Muddy Waters and Future Prospects

Assessing the Tricky Terrain Amid Pipeline Construction Hurdles

The saga of construction projects in the energy sector is equivalent to traversing an intricate maze. As the Vice President of Strategy at Avista Corp, Jason Thackston, so aptly put it, “You would think it’s as simple as a straight line, but under the dirt, it’s very complex.”

The Warrior Pipeline Conumdrum and the Perilous March Ahead

Security analysis is akin to a Sherlock Holmes escapade, where every clue matters. Regardless, investors occasionally yearn for a sense of certainty, especially following vague responses from executives in a Q&A session. The situation of Warrior Pipeline is no different. Despite the probe and subsequent response hinting at potential progress, with a hint of optimism, Mackie McCrea, Co-Chief Executive Officer and Chief Commercial Officer of Energy Transfer, insinuated that “FID is imminent,” yet the conclusive footprint remained shrouded in ambiguity.

Peering into the Crystal Ball of EBITDA and Market Dynamics

The crystal ball of EBITDA projection is shrouded in uncertainty. Enticing as it may seem to soar above these projections, Tom Long, Co-Chief Executive Officer and Chief Financial Officer, reminded investors of the underlying volatility of commodity prices and deferred capital. He conveyed a hint of caution, underscoring that the ambiguity is largely shaped by the ebb and flow of commodity prices and postponed capital allocation. In the obscure world of EBITDA projection, a pinch of skepticism shrouds even the most optimistic forecasts.

M&A Musings: Sunoco’s Acquisition and Prospects of ET System Optimization

In the wake of Sunoco’s substantial acquisition, the prospect of ET system optimization crops up, teasing analysts with a glimpse of potential opportunities. With insightful restraint, Tom Long downplayed the notion, subtly indicating that a resonating silence encases the notion of M&A within the ET echelons.

Navigating Amidst NGL Exports and the Quandary of Margin Pressures

The NGL export arena, akin to a high stakes poker game, entails dealing with variables beyond domestic control. The ebbs and flows of shipping issues, illustrated by Mackie McCrea’s diplomatic response, paint an affecting portrait of the journey ahead. The ambiguity of exports continues, yet the game of NGL exports unfolds in the shadow of steamy Panama canals and fickle international shipping lanes.

The Crestwood Acquisition Jigsaw Amidst Cost Synergies and Downstream Gains

A corporate acquisition is akin to a calculated game of chess, a trail fraught with unforeseen challenges and unexplored advantages. The Crestwood acquisition remains an intriguing puzzle for Energy Transfer, yet the company’s conservative stance hints at an unveiling synergy, laying the groundwork for potential downstream gains with a measured stroke of caution.

Energy Company Reflects on Commercial Opportunities and Future Growth

Business Update and Future Prospects:

The recent earnings call by a leading energy company shed light on their firm disposition towards future growth and commercial opportunities. The company’s Co-Chief Executive Officer and Chief Commercial Officer, Mackie McCrea, articulated the ongoing journey of exploration and discovery as they navigate the current landscape. The company remains keen on uncovering unexplored potential, akin to turning over new rocks and finding hidden gems underneath in each new acquisition. This renewed perspective has allowed the company to envision significant logistical advancements mobilizing combined assets of the enterprise and new additions to their portfolio such as the Crestman assets in the Delaware Basin. In the DJ Basin and the Bakken, there are promising initiatives under consideration that could further fortify their market position.

The Co-Chief Executive Officer and Chief Commercial Officer expressed optimism about the resultant impact these augmentations could have on their crude oil pipeline out of North Dakota and the distribution of propane and butane under the aegis of Crestwood. The synthesis of these synergies is expected to yield commercial advantages and expand the market reach for their products, allowing the company to forge robust connections in new domains, particularly in the Northeast.

Insights on Financial Strategy and Growth Projections:

Upon probing for insights into the growth strategy and intended expenditure for prospective projects, the company’s Co-Chief Executive Officer and Chief Financial Officer, Tom Long, emphasized the company’s unfettered approach in evaluating economically feasible projects. Estranged from setting concrete ceilings, the company iterated a clear commitment to appraising projects that promise commendable returns, even if the stakes surpass the preconceived limits. It was iterated that the projected growth capex target of $2 billion to $3 billion lacks stringency in defining an absolute cap, clearly signaling the company’s openness to surpass this benchmark if justified by potential returns on investments.

Assessment of Future Mergers and Acquisitions:

The discussion then meandered towards the company’s outlook on future mergers and acquisitions in the year 2024. The Co-Chief Executive Officer and Chief Financial Officer accentuated the company’s disciplined approach towards acquisitions, emphasizing an unwavering commitment to make judicious selections in the pursuit of accretive and deleveraging acquisitions. The measured approach to acquisitions was underscored as pivotal to reinforcing the company’s financial robustness and sustaining uniform growth in its distributions without compromising the integrity of its balance sheet.

Closing Remarks and Looking Ahead:

Summarily, the earnings call radiated an air of optimism and purposefulness as the company expressed gratitude towards stakeholders and shareholders for their unwavering support. The call concluded on a note of anticipation for a sustained dialogue and exchange of sentiments, resonating with a sentiment of continuity and resoluteness in the pursuit of future endeavors.

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