Energy Transfer Earnings: Healthy Results But Distribution Payout Growth Is Slowed

Energy Transfer Stock at a Glance

• Fair Value Estimate: $17.50
• Star Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None

Energy Transfer Earnings Update

Energy Transfer’s ET first-quarter results were healthy, and its raised full-year forecast is generally in line with ours. The partnership boosted its 2023 EBITDA to a midpoint of $13.25 billion compared with $13.1 billion previously, mainly reflecting the addition of the just-closed Lotus deal. This is essentially in line with our $13.27 billion forecast. Growth capital spending for 2023 was also increased modestly to $2 billion from last quarter’s midpoint guidance of $1.7 billion, again mainly reflecting Lotus, and already incorporated in our model. We expect to maintain our $17.50 per unit fair value estimate and no-moat rating.

The biggest news, in our view, was after several quarters of very rapid distribution increases to an annualized $1.22 a unit, growth was slowed this quarter to just a penny, or $1.23 annualized. For context, last quarter’s increase was a 75% increase over the prior year. The partnership is now targeting a fairly modest 3%-5% annual growth rate. We had thought in the past the rapid increases were designed to position Energy Transfer as yield play and push up its stock price, and that has yet to come to fruition. The stock remains in the $11-$13 range it has been over the past year while the distribution increases have been rolled out.

With that potential strategy seemingly foiled for now and leverage already at the low end of Energy Transfer’s 4-4.5 times range, this raises the potential for unit buybacks. We would be much more in favor of unit buybacks with excess cash, going forward, given the undervalued units, especially given Energy Transfer’s propensity to pursue somewhat questionable mergers and acquisitions at times and growth spending with excess cash. It remains to be seen if management will execute on that front, as growth seems to be the primary focus area for the time being.