nimis69
As an investor and trader in Energy Transfer LP (NYSE:ET), I would suggest that ET does not need to do anything dramatic to the top line for the investment to be a dramatic success. Let’s look at the numbers.
If we assume ET is going to earn about $13 billion of EBITDA here in 2022 and Interest and Maintenance cost about $3.2 billion and CapEx investments will be a bit less than $2 billion, then we can agree that ET is generating ($13 – $3.2 – $2 = $7.8 billion) with which it can pay dividends, reduce debt, grow faster or buy back units. That is all one needs to see why ET ought to rise 50% or more within a few short years, here’s why.
In the past, the ET story was one where management wanted to grow extremely quickly and they used a lot of debt to pursue organic growth as well as make acquisitions. To suggest that ET misjudged the changing political environment and relied too heavily upon Wall Street financing is an understatement. CEO Kelcy Warren was too aggressive for his own good, another understatement. DAPL and ME2X were enormous headaches, the Williams Companies (WMB) attempted acquisition ended badly, more understatements.
But by now everyone in the industry, even ET management, understands just how difficult it is going to be to build any sort of new infrastructure in the Northeast or on the West Coast. Kelcy Warren is not going to attempt anything in California, New York, Massachusetts, etc., despite the obviously insufficient infrastructure languishing in those states. Everyone, including Kelcy Warren, now understands that Wall Street financing and ever-larger amounts of debt are no longer acceptable to the investing public. Leverage is dropping for the entire industry as all the pipeline companies shy away from or reduce their debt loads. ET, Enterprise Products Partners L.P. (EPD), and others like them seem to see a future where they will simply build and invest with the cash that they can generate annually. ET now generates so much cash that the company appears to be able to invest $2 to $4 billion per year in new assets while they also pay down their debts by another $2 to $4 billion per year. We believe this is a game changer for investors that has yet to be reflected in the unit price.
With $13 billion in EBITDA, it truly appears that ET can afford to invest $3 billion per year in new assets and also reduce its debt by $3 billion per year, while ET continues to distribute $4 billion and more via dividends. As debt drops rapidly, perhaps by as much as $10 billion over the next 3 years, the interest savings ought to approach $550 million annually. That alone ought to drive a credit upgrade which will bring in new investors and raise ET’s reputation, deservedly so.
As for the dividend, let’s remember that ET has about 3.1 billion units currently outstanding, so next year’s $1.22 distribution requires about $3.8 billion. If we dare to imagine that ET might bump the dividend up to $1.50 in the next 3 years, that suggests ET would need ($1.50 x 3.1 = $4.65 billion) to do so. Is this possible? Let’s see: $13 billion – $3 (interest and maintenance) – $3 (CapEx) – $3 (annual debt reductions) = $4 billion remaining, so there isn’t quite enough at the moment, but if we allow ourselves to wait 3 years, we find there are numerous ways in which ET can easily take the dividend to $1.50.
First, if we just assume the debt declines by $3 billion per year, then the interest savings in 3 years ought to just about cover the amount needed to pay out $4.65 billion in dividend distributions. Second, if we assume the new projects that ET is so excited about do get completed, then the $9 billion of new assets ought to generate FAR more than enough to allow ET to distribute $1.50. If ET earns a 12% ROI on the $9 billion invested over the next 3 years, would you agree that $1.08 billion in new EBITDA ought to likely be more than enough to offset old asset obsolescence and also lift ET’s yearly results by maybe $500 million? I think so.
Last, if we listen and choose to believe management on their conference calls, then we see that ET really does not intend to bet the ranch on their Lake Charles LNG facility nor any other new project. As for Lake Charles, they specifically said they intend to sell off a significant portion of the project to enable its construction to be done with “other peoples’ money.” In fact, management stated a few times that they saw no reason to invest more than about $3 billion per year going forward on new projects, and they only see themselves investing about $2 billion in 2023. They realize the investment community won’t take kindly to goosing annual growth rates from there, blind ambition is potentially a thing of the past. We shall see.
If one trusts ET’s management and accepts that Lake Charles is not going to cost the company more than $1 to $2 billion (on top of the land and assets being contributed), then one might also assume new ideas like building a pipeline across Panama is also not likely going to be an expensive boondoggle, one might even hope that KW has learned a few things, and at his advancing age, perhaps he seeks more stability so he can pass the GP structure onto his cherished son? He won’t be able to pull that off if ET were to remain in a state of chaos and controversy, he knows that (and he does want to pass off the business to his son someday, he said so in an interview). As such, I am willing to give him the benefit of the doubt, again, lessons have likely been learned.
What I am trying to drive home is the idea that ET does not need to perform miracles to lift the unit value dramatically. ET already is earning more than 2x its distribution and already is living within its means. Debt is declining and ET is building exclusively with cash, all they need to do is more of the same. Forget about whether ET is going to GROW, it does not need to grow for this story to work. I happen to think ET will continue to grow at 4% a year but maybe I am too naïve, but it really doesn’t matter. My confidence in the idea that ET is going to keep reducing its DEBT level is based upon what management tells me. They claim they are going to get leverage below 4.5X here by Dec 31st, 2022 and that they see value in driving the leverage ratio down closer to 4.0X. They are excited about getting a Credit Upgrade and understand what that accomplishment ought to do for the unit value.
If ET keeps reducing debt by $3 billion per year, ET can get leverage below 4.0X in two years, and if EBITDA grows at all while the debt drops by $3 billion per year, then they can get to 4.0X even more rapidly. Management has expressed little interest in buying back units so the best way they can get the unit price higher is by raising the dividend distribution. The fact that a higher share price would also make future acquisition easier and less expensive is not lost on KW and management, it would appear that they are aligned with us in that regard.
Thus, as I see it, an ET with a credit upgrade, with $9 billion less debt and a $1.50 dividend distribution, suggests ET could finally be valued more in line with its peers. Slap a 7.5% yield on $1.50 and a solid BBB credit rating, and within three years ET could easily be at $20 per unit. One does not need much growth to make that happen; one simply needs to continue on the path Energy Transfer already has set before us.
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