Energy Transfer (NYSE:ET) is one of the largest midstream companies, with a near $15 billion market capitalization and more than $50 billion in long-term debt. The company’s enterprise value is roughly $65 billion, which, by size, makes the company one of the largest midstream companies. However, the company has still fallen by 60%, or $22.5 billion since the start of 2020.
Energy Transfer Renewables Movement
Energy Transfer has announced a plan to purchase low cost solar power from a new 28 MWac solar project being built. The financial terms have yet to be announced. However, when the project goes live in 1Q 2021, it’ll likely cost the company roughly $10s of millions annually, a respectable-sized project, but a small part for Energy Transfer.
This is something worth paying close attention to. Worst case scenario, it shows that Energy Transfer isn’t irrationally connected to a particular industry and willing to diversify into even competing industries if they allow the company to improve its financial position and save costs. That’s always exciting to see regardless of the amount.
However, potentially, in a press release full of the company’s moves in renewables, the company is looking for a new energy, perhaps a more long-term popular one, where it can invest and achieve synergies with its businesses. That will help allow the company to drive additional long-term shareholder rewards.
Which one isn’t clear yet, but this is an indicative movement for Energy Transfer, one of the least willing midstream companies to accept climate change.
Energy Transfer Assets and Volume Improvements
Energy Transfer managed to continue to improve its volumes, and it has exciting assets.
Energy Transfer saw peer leading volume in 3Q 2020, and the company has continued to perform incredibly well. In NGL especially, a rapidly growing business, the company saw strong volume growth and adjusted EBITDA for the company’s business. This segment can be expected to generate long-term cash flow for the company, given its pandemic performance.
It already makes up a double-digit part of the company’s business.
The company’s assets are valuable and well distributed, connected to every major U.S. natural gas supply and demand center. Natural gas is incredibly important because its primary uses are energy production instead of transportation. That means that its volumes will fluctuate much less. More so, the benefits of natural gas over coal mean it’s important in renewables.
Energy Transfer is well positioned for handling the long-term energy transmission expected over the coming decades.
Energy Transfer Growth Capital
Energy Transfer is continuing to invest heavily in its business with significant growth capital.
Energy Transfer Growth Capital – Energy Transfer Investor Presentation
Energy Transfer had massive 2020E growth capital of ~$3.3 billion, the vast majority on NGL & refined products. That massive growth capital makes it hard for the company to achieve positive FCF. The company is rapidly dropping growth capital with 2021E growth capital at ~$1.3 billion and 2022E and 2023E growth capital at a midpoint of $600 million/year.
This growth capital might be viewed as just hurting FCF in the immediate term, but it will generate double-digit shareholder returns for the long run.
Energy Transfer FCF Path and Shareholder Returns
The company expects, after both growth capital and equity distributions, to be FCF positive in 2021. That means the ability to pay down debt, increase shareholder rewards, or any number of other paths. We believe, in the immediate term, the company should either buy back shares or reduce debt. Either can drive significant value.
With the company having ~$5 billion in post dividend FCF and ~$3.7 billion in 2021 post dividend + growth capital FCF, increasing to $4.4 billion in 2022-2023, the company can aggressively pay down debt. Each year of full debt paydown can save ~$200 million in interest expenditures. That will lead to rapid DCF increases.
The company can comfortably do this, while driving long-term shareholder rewards. We expect, throughout the 2020s, from debt alone, the company will generate double-digit shareholder returns. Growth capital will add additional several percentage points, and debt paydown or share buybacks could potentially add double digits.
A simple strategy would be to spend the 2020s paying down debt, meaning the company exits 2030 with no debt, ~$7.5 billion in annual post dividend FCF due to saved interest payments, and an enterprise value of $65 billion. Even a modest increase to $75 billion, given less debt and improved DCF, would mean 500% returns across the decade.
The simplicity with which Energy Transfer can drive long-term shareholder returns highlights the company’s financial strength.
Energy Transfer Risk
Energy Transfer’s risks are fairly well understood. Specifically, the company has a strong fee-based cash flow that will continue to drive returns. However, the company’s risk is that the massive COVID-19-related oil collapse will devastate capital spending and thereby contract renewables due to a lack of volumes in the coming years.
This remains a risk that’s difficult to quantify at this point. However, all indications are for COVID-19 to be solved next year, leading volumes to recover drastically, and supporting prices. Whether or not that happens remains to be seen, however, it’s a risk worth paying attention to.
Energy Transfer’s move into renewables, at best, is the start of a new and diversified business. At worst, it’s a sign of the company looking every it can to cut down costs and maximize margins. Either way, it’s a promising sign for the company and something that we respect and are strong fans of. In addition, the company’s other businesses remain strong.
We expect Energy Transfer to generate FCF going forward, as the company seems interested in paying down its debt. While the credit markets have yet to price this in, that doesn’t mean there are not significant returns to be had for the company. The company is doing all this in addition to its double-digit dividend, promising large shareholder rewards.
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Disclosure: I am/we are long ET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.