energy transfer ,Atte -0.23%, There is not an attractive name, but it is currently the best risk-inam profile in the market and a high yield. This is one of the biggest holdings in my portfolio.
There are five reasons to buy the stock of the midstream energy company, such as not tomorrow. However, keep in mind that investing in Master Limited Partnership means that you will get one Schedule K-1 tax form And some additional steps need to be taken with your tax filing.
1. A rock-solid financial position
After overgrowth during its final development cycle, energy transfer spent the last few years in cleaning its balance sheet. It cut its distribution in 2020 to reduce leverage, and since then, it has paid loans and funded most of its growth through free cash flow.
Today, leverage The pipeline is at the lower end of the company’s target limit. On its most recent calls with analysts, the management stated that the balance sheet is the strongest which has ever been. This gives flexibility without worrying of investing in development projects and once again to shareholders to return capital.
2. Estimated cash flow
About 90% of energy transfer earnings before interest, taxes, depreciation and refinementEbitda) Fee is from-based services, where there is no risk of commodity prices. And its many contracts are le-or-or-pay, which means that customers pay whether they use service or not. It creates stable, recurring cash flow, which actually supports its distribution and development projects.
In the last quarter, energy transfer stated that it had high percentage tech-or-pay contracts. It also helps the company to give some great visibility that it has ever done.
3. A high yield with a safe and growing distribution
As I write it, the company’s stock provides further yield of 7.5%, and it is well covered. It is generating cash twice that needs to support its distribution. The distributionable cash flow coverage of the previous quarter was multiple, which gives a lot of rooms to increase management.
This has now increased its distribution for 13 quarters consecutively, and it is above the level of pre -2020 when it had to be cut. Given its coverage ratio, strong balance sheets, and tech-or-pay contracts, energy transfer has been well deployed to increase its distribution in the next years. The management plans to increase it from 3% to 5% annually.
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4. Demand for natural gas is a catalyst
Not only energy transfer has strengthened its balance sheet and improves its contract structure, the company is also back into development mode. It plans $ 5 billion capital expenditures This year, last year, by $ 3 billion, and targeting mid-teens returns on its project slate. These are not speculative projects; They are associated with real demand with long -term contracts.
One of its biggest projects is the Huga Brinson Pipeline, which is designed to transfer natural gas from the Permian basin in West Texas to meet the demand for increasing electricity elsewhere in the state.
Energy transfer has also progressed on its long delayed Lake Charles Liquid Natural Gas (LNG) project and signed a cost-sharing deal with Midocaine Energy and many other agreements. If the project progresses, it will open a new growth avenue tied to LNG exports, which is expected to increase by 60% by 2040.
At the same time, Artificial intelligence Data centers are becoming a possible source of incremental demand. The company signed a deal with cloudburst to supply gas to a new AI-centric data center, which is planned to be built in Texas.
The management has also said that it is in active discussion with over 60 power plants and more than 200 data centers in 14 states. These occasions require relatively low capital and they can generate quick returns.
5. Stock looks very cheap
Even with everything right, energy transfer still moves forward enterprise value-To -bita is only many of the 8. It is below its historical average and is discount for most of its peers. Meanwhile, from 2011 to 2016, midstream Master Limited Participation (MLP) Trade did an average Ebitda Multiple of around 13.7.
Investors have still not fully adjusted how strong energy transfer business today is today. The company has cleaned its balance sheet, improves its contracts, and pursuing disciplined development with solid returns. It provides development to go with a seductive yield, making it a solid stock for income-focused investors.
