Energy Transfer's Growth Outlook Just Keeps Getting Better

Energy Transfer (ET) reported a Q3 2024 slowdown with adjusted EBITDA and distributable cash flow slightly down year-over-year due to one-time items, though operational volumes saw strong growth. Despite this, the midstream MLP anticipates a reacceleration of growth in the coming years, fueled by significant capital investments of $4.6 billion this year and $5 billion in 2026 for expansion projects like the Mustang Draw plants and Hugh Brinson pipeline. The company has also secured new long-term gas supply agreements with major clients, including Oracle for data centers and utility Entergy, which are projected to generate substantial incremental cash flow from late 2024 through 2028 and beyond, positioning ET for robust total returns alongside its 7.8% distribution yield.

Analysis

Energy Transfer (ET) reported a Q3 adjusted EBITDA of $3.8 billion, down from $4 billion year-over-year, and distributable cash flow of $1.9 billion, below last year's $2 billion, primarily due to one-time items. Despite this, operational performance remained strong, with NGL and refined products terminals volumes up 10%, NGL transportation up 11%, NGL exports up 13%, and midstream gathered volumes up 3%. The company's year-to-date cash generation of $6.2 billion comfortably covers its $3.4 billion in distributions.

The company is poised for growth reacceleration, investing $4.6 billion in growth capital this year and projecting another $5 billion in 2026. Recent completions include the Nederland Flexport NGL expansion and Badger gas plant relocation, with the Mustang Draw plants and the first phase of the Hugh Brinson gas pipeline expected by the end of next year. These projects are anticipated to supply increasing cash flow in 2026 and 2027.

Energy Transfer has secured significant long-term gas supply deals, notably with Oracle for U.S. data centers, with initial flows expected by year-end and full completion by mid-2026. Additional agreements with CloudBurst, Fermi, and utility Entergy (starting 2028) further enhance future incremental cash flow. Longer-term projects like Hugh Brinson Phase II, Bethel gas storage expansion, and the $5.3 billion Desert Southwest Expansion extend the growth trajectory into 2027-2029.

These strategic investments and new contracts position Energy Transfer for accelerated earnings growth and robust total returns, complementing its current 7.8% distribution yield. The diversified project pipeline and strong operational performance underpin a positive long-term outlook, despite the Q3 earnings dip attributed to one-time factors.

Key Decisions for Investors

• Monitor the execution and timing of Energy Transfer's significant capital projects and new gas supply agreements, as these are crucial for realizing anticipated cash flow acceleration.
• Evaluate the sustainability of the 7.8% distribution yield, which appears well-covered by current cash flow and is expected to benefit from future growth initiatives.
• Consider the long-term growth potential driven by strategic investments in midstream infrastructure and new customer contracts, particularly in the growing data center sector.
• Factor in the tax implications of an MLP structure (Schedule K-1) when assessing Energy Transfer's suitability for a diversified investment portfolio.