Where Will Energy Transfer Be in 1 Year?

Energy Transfer (ET), a midstream MLP with a 7.5% distribution yield, presents a mixed outlook for investors. While management projects 3-5% annual distribution increases and is investing $5 billion in capital projects in 2025 across its diversified asset base, the company's history includes a distribution cut in 2020 and a controversial deal termination with Williams in 2016, raising trust concerns for some investors. Despite improved leverage, conservative investors may prefer peers like Enterprise Products Partners with a more consistent track record.

Analysis

Energy Transfer (ET), a diversified midstream master limited partnership, offers a significant 7.5% distribution yield, with approximately 90% of its adjusted EBITDA derived from fee-based contracts for its energy pipeline, storage, and transportation assets. The company's EBITDA is spread across natural gas liquids and refined products (24%), midstream assets (23%), natural gas pipelines and storage (21%), crude oil (18%), and stakes in publicly traded MLPs (14%). Management has guided for 3% to 5% annual distribution increases and is deploying $5 billion in capital investments during 2025, spread across its segments, with projects expected to enhance cash flow from 2025 onwards. While leverage is currently within management's target range, Energy Transfer's history includes a distribution cut in 2020 amid energy sector uncertainty and a contentious withdrawal from an agreed acquisition of Williams Companies in 2016, which may raise concerns for investors prioritizing consistent income and corporate governance. Although the company appears to be on a path of slow and steady growth, this contrasts with peers like Enterprise Products Partners, which boasts a 26-year history of consecutive annual distribution increases.

Key Decisions for Investors

• Investors assessing Energy Transfer's 7.5% yield and projected 3-5% distribution growth should carefully consider the company's past distribution cut in 2020 and the previous controversy surrounding the Williams deal termination.
• Closely monitor the execution and financial returns of the $5 billion capital investment program scheduled for 2025, as its success is crucial for underpinning future cash flow generation and distribution hikes.
• For investors with a lower risk tolerance seeking reliable income, an evaluation of alternative midstream entities like Enterprise Products Partners, which has demonstrated a more consistent track record of distribution growth, may be warranted.