Energy Transfer (NYSE: ET) already pays a lucrative distribution. The master limited partnership's (MLP) payout is 6.7%, putting it several times higher than the S&P 500's dividend yield of 1.2%. Even with that massive yield, the midstream giant aims to grow its distribution by 3% to 5% per year.
It should have plenty of fuel to achieve that plan for the next several years. The MLP is adding to its already robust fuel supply by sanctioning a new $2.7 billion pipeline project.
Giving Hugh Brinson the green light
Energy Transfer recently announced that it reached a positive final investment decision to build the Hugh Brinson Pipeline, formerly the Warrior Pipeline project. The project will boost natural gas transportation capacity out of the Permian Basin to support growing natural gas demand. The company expects to invest $2.7 billion into the project, which it will build in two phases. It has secured long-term, fee-based commitments from customers to support the project.
Phase 1 of Hugh Brinson will see the company construct a 400-mile pipeline from west Texas to the Dallas-Fort Worth area, where it will connect to Energy Transfer's vast pipeline and storage infrastructure in that region. Phase 1 will have 1.2 billion cubic feet per day (Bcf/d) of capacity and should enter commercial service by the end of 2026. The company will also construct the 42-mile Midland Lateral to connect third-party natural gas processing plants in the Permian Basin to this pipeline.
Phase 2 would see Energy Transfer add compression to increase the pipeline's capacity to 2.2 Bcf/d. Depending on demand, Energy Transfer could construct Phase 2 at the same time it builds Phase 1.
The large-scale gas pipeline will supply Energy Transfer with an incremental stream of stable cash flow backed by long-term contracts. Meanwhile, it will support growing gas production in the Permian and rising gas demand in Texas from power plants and data centers.
Lots of fuel, with more to come
The Hugh Brinson pipeline project adds to Energy Transfer's growing backlog of organic expansions. The company is on track to invest $2.8 billion to $3 billion in organic capital projects this year. They include expansions of its Nederland export terminal, eight 10-megawatt natural gas-fired electric generation facilities, and a ninth natural gas liquids fractionator at its Mont Belvieu complex, which it recently approved. As with Hugh Brinson, these projects should all enter commercial service through 2026.
Energy Transfer will also get a boost from its recent acquisition of WTG Midstream. The company closed the nearly $3.1 billion deal in July. It expects the acquisition will add $0.04 per unit to its distributable cash flow next year, with the accretion increasing to $0.07 per unit by 2027. For perspective, that's more than enough additional cash flow to support its distribution growth rate for the next several years, given its current annual growth rate target of $0.01 per unit, a roughly 3% to 5% annual rate.
The MLP has several other potential expansion projects in the pipeline beyond Hugh Brinson. Following the election outcome, Energy Transfer is "very bullish on getting [Lake Charles] LNG to the finish line," co-CEO Marshal McCrea said on the company's recent third-quarter conference call. The company has been working on the liquefied natural gas (LNG) export project for nearly a decade. The current administration paused approving new LNG export projects, further delaying Lake Charles. However, the incoming administration will probably be much more open to expanding the country's energy infrastructure. The company has signed LNG contracts with several potential customers supporting the project.
In addition to Lake Charles LNG, Energy Transfer is also working on the Blue Marlin Offshore Port, a potential carbon capture and sequestration project, and building blue ammonia hubs at Nederland and Lake Charles.
The company also has the financial flexibility to continue making accretive acquisitions as opportunities arise. It has long been a consolidator in the midstream sector. It also bought Lotus Midstream and acquired fellow MLP Crestwood Equity Partners last year. Securing additional expansion projects and accretive acquisitions would give Energy Transfer even more fuel to grow its high-yielding distribution in the future.
The total package
Energy Transfer offers investors a high-yielding distribution that it expects to steadily increase in the coming years. Given its recent acquisitions and secured expansion projects, it has ample fuel to support its growth. Meanwhile, it's working to secure even more growth to further enhance and extend its ability to increase its distribution. That makes Energy Transfer an excellent option for those who want a lucrative and rising income stream and are comfortable with investing in an MLP that sends investors a Schedule K-1 Federal Tax Form each year.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
