Energy transfer (NYSE: AND) has historically been one of the weakest large midstream companies in terms of recovery. The company has a market capitalization of over $30 billion and leverage of over $40 billion. However, the company continued to suffer from an inability to control capital spending and instead focus on shareholder returns.
Energy Transfer Updates
Energy Transfer has changed many aspects of its plans from its original directions 1-2 years ago.
Energy Transfer Update – Energy Transfer Investor Presentation
Energy Transfer has completed several major construction phases and is beginning to undergo new phases of new projects. Many of these projects are respectable mid-sized projects providing hundreds of thousands of barrels of relevant capacity. The company has also begun construction on several new expansion projects which it plans to commission before the end of the year.
Financially, the company has drastically changed its initial guidance for 2022. While adjusted EBITDA is expected to be around $12.4 billion, the company has significantly increased its growth capital guidance to nearly $2 billion. In our view, this is the same mistake the company has made before, where rather than focusing on shareholder reward levers, it is looking for growth.
Growth is good, but when interest rates are rising and the market is continually punishing you for your $40 billion mound of debt, there are better things to focus on. The company continues to pursue long-term strategic growth, which we are excited about, but again we would like to see the company deploy its capital in different ways.
Energy Transfer Asset Base
It is undeniable, however, that Energy Transfer is a portfolio of assets that support our modern standard of living.
Energy Transfer Asset Portfolio – Introducing Energy Transfer Investors
Energy Transfer is one of the largest transporters of natural gas, natural gas liquids, crude oil and refined products, as well as some of the necessary separation, storage and processing facilities. The company touches a substantial percentage of these products that travel across the United States and collects a royalty for each of these experiences.
Despite concerns about climate change and shifting demand, the company remains buoyed by certain industries and weather conditions that make a full transition to renewable energy difficult. We anticipate that the company will continue to operate in its current form for several decades, before it must slowly adapt, modify and change its assets.
Energy Transfer Growth Capital
Energy Transfer’s new growth capital will be spent on a variety of projects, many of which will be complementary additions to existing projects.
Energy Transfer Growth Capital – Presentation to Investors in Energy Transfer
The company expects the $2 billion to add approximately $350 million to annualized EBITDA, representing EBITDA growth of nearly 3%. The majority of this sum will go to integrated midstream projects, but there were also new take-out inter/intrastate assets and a number of projects in the company’s NGL and crude oil segments.
There are two takeaways here that we want to highlight.
The first is that these projects are not “bad” in any way. These are solid complementary projects that integrate well with the company’s assets. They generate an EBITDA return of around 16% and are fully covered by the company’s existing cash flow. With long-term demand for these projects expected to remain strong, it’s exciting to see.
However, the second takeaway is that the company’s shares are still cheap. He has a dividend yield of more than 8% than he can comfortably afford, and his net worth of $31 billion is less than his net debt. We believe the company has many levers through increased dividends, share buybacks and debt repayment that will provide higher returns than growth capital.
Transfer of energy Potential return for shareholders
Energy Transfer has the ability to generate substantial returns for shareholders.
Energy Transfer earns about $8 billion in annual DCF and pays about $2.4 billion in dividends. That leaves him with $5.6 billion. After $2 billion in growth capital, that leaves him with $3.6 billion. We’d like to see that total amount allocated to shareholder rewards, however, the company hasn’t provided detailed guidance here.
However, there is one key takeaway that the company generates a DCF return of almost 30%. This return, whether in dividends, debt repayment, or stock buybacks, all generates active shareholder rewards, underscoring how valuable the company is for interested shareholders.
The biggest risk for shareholders is another downturn. The company tends to spend according to market cycles, which means that it spends a lot when the market is good and it cuts its expenses when the market is bad. Especially with high interest rates, the company’s huge indebtedness presents a liability if the company has to refinance when the market goes down.
These risks deserve special attention.
Energy Transfer is a cheap stock; however, we strongly believe the company is making some of the same mistakes that have plagued it in the past. The company is rapidly increasing its growth capital spending, rather than focusing on other forms of shareholder return, which we believe could be much more immediate.
More so, as a company that has struggled with its debt in the past, we are concerned about its lack of focus in this regard, given that a rapid rise in interest rates could make refinancing much more difficult. in the event of a future downturn. We’re still fans of the company, and it’s still good business, however, we continue to believe that management can drive higher returns.