After suffering a painful distribution cut at the end of 2020 that cut their payouts in half, fortunately the outlook was much more positive a year later for Energy Transfer (ET) unitholders with the prospect of seeing higher payouts coming soon, as my previous article talked about. Much to the delight of their unitholders, they kicked off 2022 with a solid 15% increase that sees their distribution yield at a high of 6.97%. Even more excitingly, looking ahead, management has effectively signaled that a very strong payout yield of over 12% is now its top priority, as shown in this follow-up analysis which also examines its fourth quarter financial results. quarter of 2021 recently published.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This Google document provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing distribution coverage through distributable cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial position.
After having a very strong start to 2021 thanks to the winter storm in Texas, the recovery in the energy sector during the rest of the year saw their operating cash flow reach $11.162 billion, thus setting a new record and achieving a very impressive 51.63% year-over-year from their previous result of $7.361 billion in 2020. While $515 million of their operating cash flow in 2021 were due to a temporary working capital drawdown, even though they were removed with the comparable working capital drawdown of $47 million in 2020, it still sees their underlying operating cash flow at $10.647 billion in 2021 and therefore a very impressive 45.57% year-over-year increase from their equivalent result of just $7.314 billion in 2020. In the end, they finally p roduced a whopping $7.222 billion of free cash flow which easily provided a very strong distribution coverage of 380.51% to their distribution payments of $1.898 billion and thus provides the opportunity for higher distributions, which are now a top priority, per the management commentary included below.
“Future distribution level increases will be assessed quarterly with the ultimate goal of returning distributions to the previous level of $0.305 per quarter or $1.22 on an annualized basis while balancing our leverage target, growth and unit buybacks.”
“So if you really look at this, go back to the – at least the $1.22 that we talked about – that we had before, before we cut distributions, which moved to a top priority, but we clearly have these big projects that we’re talking about, likewise, those capital projects, and then you mix up debt repayment the same way. Unit buybacks, I’d probably put like behind those 3.”
– Q4 2021 Energy Transfer Conference Call.
Fortunately, management hasn’t been vague with them, making it clear that higher distributions are not only on the horizon with quarterly reviews, but more importantly, their top priority is to at least reinstate their old annual distributions of $1.22 per unit that were paid before the COVID-19 pandemic and the resulting reduction in 2020. In addition to marking the end of a few painful years for their unitholders, this should also provide a very high by 12%+ on their current unit price of $10.05 and, thankfully, looking ahead to their estimated free cash flow, that shouldn’t prove to be a difficult task.
When reviewing their guidance for 2022, they forecast adjusted EBITDA of $12 billion at the midpoint, a slight decline of 7.70% from their 2021 result of $13 billion which, for As a reminder, saw a significant one-time increase in the first quarter due to the winter storm in Texas which briefly jolted local energy markets. If their underlying operating cash flow of $10.647 billion were to experience a similar magnitude of change, which makes sense given their positive correlations, that leaves their estimated operating cash flow for 2022 at around 9 .8 billion dollars.
On the cash outflow side of the equation, he first sees growth capital expenditure of $1.75 billion mid-term and considering their maintenance capital expenditure of $581 million in 2021 , it seems reasonable to expect around $600 million in 2022, based on slides five and thirteen of their fourth quarter 2021 results presentation. billion and after subtracting their estimated operating cash flow of $9.8 billion, that leaves $7.45 billion. Removing their usual miscellaneous cash outlays of approximately $1.1 billion which are primarily related to their distributions to non-controlling interests as shown below the chart above, this ultimately leaves their estimated free cash flow at around $6.35 billion.
Following their Enable Midstream acquisition in the fourth quarter of 2021, they saw their unit count increase to 3,082,828,515 as it was a unit-for-unit swap, meaning it would cost $3.761 billion a year to reinstate their old annual distributions of $1.22 per unit. They also incur $280 million a year in preferred distributions, though thankfully these barely move the needle against their massive free cash flow.
With their estimated free cash flow in 2022, obviously overshadowing the cost of restoring their former distributions and preferred distributions, they could also end up with around $2.3 billion a year of excess free cash flow after the payments of distribution, which not only facilitates management. to achieve their top priority of restoring their distributions, but also leave a margin of safety. If not used to fund unit buybacks or acquisitions this could be geared towards deleveraging or alternatively it can also provide a buffer for increased growth capital spending in future years without jeopardize their distribution coverage.
Since the previous analysis, their net debt has increased to now stand at $49.366 billion, which is above its previous level of $46.004 billion that followed the first half of 2021, but still remains in below its all-time high of $51.071 billion at the end of 2020. This stems from their Enable Midstream acquisition which had its net debt of $3.968 billion consolidated into their balance sheet during the fourth quarter of 2021. If the looking to 2022, barring new acquisitions or significant unit buybacks, their net debt should decline by at least $3 billion given the previous cash flow estimate, or even more, as it seems more likely that their distributions will steadily increase each quarter rather than being instantly restored to their old level the following quarter.
Following their very strong financial performance in 2021 and slightly lower net debt, it was no surprise to see their leverage decline across the board, with their net debt to EBITDA and net debt to operating cash flow falling at 3.83 and 4.42 respectively. While these remain in the high territory between 3.51 and 5.00, at least they are now well below the very high territory above 5.01 where they both ended 2020 at 5.29 and 6.94 respectively.
If their net debt decreases by more than $3 billion as expected, this would represent a mid-to-high single-digit decrease from its current level of $49.366 billion and therefore would broadly reflect the projected drop of approximately 7% mentioned earlier. for their Adjusted EBITDA, thus seeing their leverage remain broadly unchanged after 2022. Although high leverage may not sound positive, given their prospects of generating another $2.3 billion per year in cash flow excess available after distribution payments, even after the potential restoration of their former distributions, it is expected to continue to decline and therefore does not raise significant concerns, particularly given the relatively stable nature of the midstream industry.
While their liquidity is not a big concern given their ability to generate massive free cash flow, it nevertheless remains adequate with a current ratio of 0.97 which is effectively unchanged from its result of 0.96 when from the previous analysis. Even though their cash balance is still very low relatively speaking with a cash ratio of just 0.03, it is nevertheless not too much of a concern thanks to their main five-year credit facility which retains an additional $2.03 billion. available, not to mention billions more. -dollar balances available under separate credit facilities for some of their various subsidiaries. Their very large operational size and sound financial position should allow this easy access to debt markets to continue, providing liquidity and the ability to refinance debt maturities when needed, even as central banks tighten policy. monetary.
With higher payouts already looking all but assured at the end of 2021, it has always been very exciting to not only see them grow by 15%, but also to see management signaling the restoration of their old payouts as a top priority. Luckily, they are able to generate sufficient free cash flow and so management should have no problem meeting this target while being able to reduce their net debt. Once complete this would see their current unit price trading at a very high yield of 12%+ on the current cost making it virtually certain to push their unit price higher as the market can no longer ignore their immense value and it So shouldn’t be surprised that I think maintaining my strong Buy rating is appropriate.
Notes: Unless otherwise stated, all figures in this article are taken from Energy Transfer’s SEC Filingsall calculated figures were performed by the author