Energy Transfer: A Steady Stream of Passive Income
When it comes to generating passive income, few investments have proven as fruitful for me as Energy Transfer (ET). As a master limited partnership (MLP), Energy Transfer has become a cornerstone of my portfolio, providing a high-yielding and steadily rising distribution that has significantly bolstered my income.
My Journey with Energy Transfer
My relationship with Energy Transfer began in early 2020, a time that coincided with the onset of the COVID-19 pandemic. Initially, my timing seemed unfortunate as the MLP was forced to slash its distribution in half to conserve cash. However, this setback turned out to be a pivotal moment for the company and, ultimately, for my investment.
In the wake of the distribution cut, Energy Transfer focused on strengthening its financial foundation. The company prioritized debt repayment, which effectively reduced its leverage ratio. Fast forward to today, and Energy Transfer boasts a robust investment-grade balance sheet, with a leverage ratio comfortably situated in the lower half of its target range of 4.0 to 4.5 times. This financial prudence has not only stabilized the company but has also set the stage for future growth.
Rebuilding and Expanding
With a healthier balance sheet, Energy Transfer has regained its financial flexibility. The company has not only restored its distribution to pre-pandemic levels but has also embarked on a path of consolidation within the midstream sector. Notably, Energy Transfer’s acquisition of Crestwood Equity Partners for $7.1 billion last year allowed me to merge two significant income-generating investments into one. This strategic move has further solidified my confidence in Energy Transfer as a top income-producing asset.
The Strength of Cash Flow
One of the standout features of Energy Transfer is its ability to generate steady cash flow. Approximately 90% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) stem from stable, fee-based sources. This reliable income stream, combined with a well-balanced asset mix, significantly mitigates risk for investors like myself.
Currently, Energy Transfer generates around $8.5 billion in distributable cash flow annually, while its distributions amount to about $4.5 billion. This results in a conservative payout ratio of 53%, allowing the company to retain roughly $4 billion each year for various initiatives, including growth projects, further debt reduction, and unit repurchases. With capital spending projected at approximately $3.1 billion this year and a long-term outlook of $2 billion to $3 billion annually, Energy Transfer is well-positioned to maintain its financial flexibility.
Growth Through Acquisitions
Energy Transfer’s capital investments are not just about maintaining the status quo; they are designed to enhance future growth. The company has made several strategic acquisitions recently, including the purchase of Lotus Midstream for $1.5 billion and WTG Midstream for $3.1 billion. These moves are expected to bolster Energy Transfer’s growth trajectory and further increase its distributable cash flow.
The MLP’s commitment to growing its cash flow translates into a steadily rising distribution for investors. Energy Transfer aims to increase its payout by 3% to 5% annually, with quarterly raises of $0.0025 per unit, or $0.01 annually. Given the current yield of nearly 8%, this growth rate is not only healthy but also achievable. For instance, the anticipated accretion from the WTG Energy acquisition alone is projected to contribute $0.04 per unit by 2025, increasing to $0.07 per unit by 2027.
A Reliable Income Stream
Despite a rocky start, my investment in Energy Transfer has evolved into my largest source of passive income. The company’s plans for consistent quarterly payout increases, coupled with its strong financial foundation and stable cash flow, make it a highly bankable income stream. As I look ahead, I remain committed to holding a substantial position in Energy Transfer and will likely continue to add to it, confident in its ability to deliver reliable income for years to come.
For anyone seeking a robust investment that offers both stability and growth potential, Energy Transfer stands out as a compelling option in the realm of passive income generation.