Energy transfer (NYSE: AND) has long been a favorite, despite the market’s continued aversion to the company. Despite the company’s position near 52-week highs, we still see the company as having significant potential to continue to drive shareholder rewards that outperform the market. This helps underscore how valuable the business is.
Energy Transfer Performance 2021
Energy Transfer ended 2021 with an incredibly strong performance.
Energy Transfer has completed major construction through 2021. The company completed the massive $2.5 billion Mariner East Pipeline project and continued to improve NGL transmission and fractionation volumes . The company also expanded storage and worked on other integration and add-on projects. These efforts will continue until 2022.
The company achieved $13 billion in EBITDA (supported by the short-term blip of winter storm Uri) as well as a whopping $8.2 billion in FCF. The company spent $1.4 billion on growth capital while reducing its long-term debt by $6.3 billion. The company had $6.4 billion in cash after its >6% dividend which was mostly spent on capital reductions.
Finally, the company acquired Enable Midstream. He paid a pretty steep price in our view by using an all-stock acquisition, diluting existing shareholders. It’s disappointing as the company still hasn’t used stock buybacks and is paying a hefty dividend. We would have liked to see it use an all-cash transaction or at least something of a mix.
Energy Transfer Forecast 2022
Energy Transfer guidance for 2022 calls for reasonably strong cash flow generating respectable returns for shareholders.
The company sees about $12 billion in adjusted EBITDA, which should translate to about $7.5 billion in DCF. The company’s dividend obligations are approximately $2.1 billion, which would imply $5.4 billion of post-dividend cash flow for shareholders. That’s substantial for a company with a market capitalization of just under $35 billion and long-term debt of just under $45 billion.
The company’s cash flow is expected to be primarily fee-based (90%) with minimal commodity exposure that benefits from the current high commodity prices.
Energy transfer and excitable management
Energy Transfer is spending approximately $1.75 billion in 2022E growth capital on a variety of projects, albeit mostly mid-term.
The company is spending $1.75 billion in growth capital at ~6x EBITDA, which means ~$300 million in new EBITDA (~3-4% EBITDA growth). However, the company has enthusiastic leadership when it comes to capital spending, and it has been ramping up capital spending quickly in good times before.
There is nothing wrong with that. However, the company’s debt reached an unsustainable level when the black swan event of the COVID-19 crash occurred. And businesses should always expect the unexpected. We think management could make better decisions.
Our perspective on debt
Energy Transfer has long-term debt of $44 billion. That’s down significantly from $50 billion at the start of 2021. We don’t hate debt, and the company has used it effectively to build a midstream empire. However, there is no denying that he was also punished significantly by this market for having this amount of debt.
The company’s annual interest expense is nearly $2.5 billion per year. It’s comfortably affordable, but paying off the debt could lead to a 33% increase in DCF. However, we would like management to opportunistically focus on growth. In our view, share buybacks could generate much higher returns by saving the dividend.
Instead of diluting existing shareholders, the company can continue to increase its dividends at lower cost and support overall shareholder rewards. The company’s debt is close to its target, so spending extra money on growth wouldn’t reward long-term shareholders as well in our view.
Transfer of energy Potential return for shareholders
Energy Transfer has the ability to generate substantial returns for shareholders. The company, after dividends, will earn $5.4 billion in DCF in 2022 according to our estimates. The company’s debt is already meeting its target of $40 billion to $45 billion, and the company has not provided any guidance on how it will spend the money going forward.
The company is spending about $1.85 billion in growth capital, implying a balance of $3.6 billion. The company could repay its debt, but it has not yet provided any guidance on how it will use the money. We would like to see share buybacks in addition to the dividend. Regardless of how the company spends the money, it should generate double-digit returns for shareholders.
Overall, Energy Transfer can generate strong double-digit returns for shareholders.
In our opinion, the thesis involves two substantial risks.
The first is management. Management put the company in a difficult debt situation, and they constantly went in the direction of growth at all costs. In our view, the mindset should be about maximizing long-term shareholder returns, and growth should only be part of that if it makes sense.
The second risk is the company’s adaptation to a changing market. The company spends less capital on alternative climate projects and low-emission projects than its competitors, which means that as the environment changes for energy demands, the company could find it difficult to stay competitive.
Energy Transfer has an impressive asset portfolio. The company has continued to use accelerated growth and has significant capabilities to continue growing EBITDA from these projects to a multiple of 6x. The company had an incredibly strong 2021 and moved its debt into its target range, with a manageable interest rate.
We’re not a big fan of management and think they’ve been bad at generating long-term shareholder rewards. We believe the company should aggressively repurchase shares ahead of other investments given its current valuation and we believe it should not have diluted its shareholders with the acquisition of Enable Midstream.
The path may be bumpy, but whatever the company spends on DCF, we expect it to generate strong double-digit shareholder rewards.