Energy Transfer (ET 0.84%) raised its full-year guidance last week when it reported its first-quarter results, continuing the company's recent strong operational performance. The stock has returned nearly 40% over the past year, including distributions.
The master limited partnership (MLP) unceremoniously cut its distribution in half in the fall of 2020 to better deal with its debt load and the state of the energy market. However, the company has turned itself around since then and just turned in another solid quarterly report which included a raise in its distribution. Its distribution is now solidly above where it was before the company cut it, which is a testament to how quickly it was able to turn itself around.
A great start to the year
As a pipeline company, volumes are very important to Energy Transfer and its results. On that front, the company saw volume growth across its segments, led by a 44% surge in crude oil transportation volumes. Crude oil terminal and NGL fractionation volumes were also both up double-digits, 11% and 10%, respectively.
This led to a nearly 13% increase in adjusted EBITDA in the quarter to $3.9 billion. Distributable cash flow (DCF) to partners, which is how much cash the company generates before growth project capital expenditures (capex), was $2.4 billion, up 17% from a year ago. The company increased its per-share distribution by 3.3% year over year to $0.3175.
The company paid out $1.13 billion in distributions to unitholders in the quarter, which would put its distribution coverage ratio at nearly 2.1 times. After paying out distributions, Energy Transfer had $1.3 billion in excess cash flow, and it spent $461 million in growth capex in the quarter. That indicates that its distribution is currently very well covered.
Looking ahead, Energy Transfer raised its full-year EBITDA guidance to a range of $15.0 billion to $15.3 billion from a prior outlook of $14.5 billion to $14.8 billion. The new forecast reflects Sunoco LP's acquisition of NuStar Energy. Energy Transfer owns the general partner interest, incentive distribution rights, and 28.5 million common units of Sunoco. Sunoco's results are included with Energy Transfer's results, so its recent acquisition will help boost its results.
Energy Transfer also now expects to spend between $2.8 billion and $3.0 billion on growth capex projects this year. About half will go toward natural gas liquids and refined product projects.
Even with the increased growth capex for the year, Energy Transfer will continue to have a lot of safety with its distribution and room to move it higher throughout the year and beyond. Its updated adjusted EBITDA guidance implies full-year DCF of at least $9 billion, while it will spend close to $3 billion in growth capex. Even with slowly raising the distribution to $0.325 per share per quarter before the end of the year, it will pay out about $4.5 billion in distributions. That should give it about $1.5 billion in excess cash to continue to pay down debt.
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An inexpensive stock
With about 90% of its adjusted EBITDA coming from fee-based activities, Energy Transfer has a relatively stable and predictable business model. Through growth projects and M&A, its looking for solid 11% adjusted EBITDA growth this year. Meanwhile, its distribution is well covered and has room to continue to grow.
Despite that, Energy Transfer trades at an attractive enterprise value (EV)-to-EBITDA multiple of just 7.4 times. That is a much lower valuation than the company traded at prior to the pandemic and before its distribution cut.
ET EV to EBITDA (Forward) data by YCharts
Given that Energy Transfer has not only restored but increased its distribution beyond pre-cut levels, the stock should have solid upside ahead as investors regain confidence in the company. It has an attractive yield of 8% and its distribution is well covered. Meanwhile, its balance sheet is in solid shape, and the company saw its senior unsecured debt rating upgraded by rating agency Fitch earlier this year.
Given all that, Energy Transfer looks like an attractive stock for income-oriented investors to consider piling into for the long term.
