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3 Things to Watch When Energy Transfer Reports Q1 Results

Matthew DiLallo, The Motley Fool

Energy Transfer (NYSE: ET) has come a long way over the past year. The midstream giant merged with its former master limited partnership and completed several other strategic transactions that have significantly improved its financial profile. The company used its increasing financial flexibility to continue investing in high-return expansion projects, which fueled record-setting results last year.

The company expects to continue growing earnings this year, which should further improve its financial profile. Here are three of the things investors should keep an eye on when the midstream company reports its first-quarter results later this week.

Pipelines heading towards the bright sun.

Image source: Getty Images.

1. See if its fast-paced growth continued in Q1

Energy Transfer hauled in $9.51 billion of adjusted EBITDA last year, up nearly 30% year over year. The company expects to continue growing at a healthy pace again in 2019. It currently estimates that adjusted EBITDA will be in the range of $10.6 billion to $10.8 billion, implying 12.5% growth at the midpoint. Driving that increase will be the continued expansion of its midstream footprint.

The company has completed several projects over the past few months that should help feed growth during the first quarter. Ideally, the company didn't face any unanticipated headwinds in the period that offset those positives. One area to watch, however, is any impact from all the volatility in commodity prices over the last several months. That's because between 10% and 15% of the company's earnings have some exposure to commodity prices, which could be under pressure in the quarter due to the big swings in crude prices since last October.

2. Look for any changes to capital spending

Energy Transfer plans to spend another $5 billion on expansion projects this year. But that number could change. For starters, the company and its partners recently pulled the plug on the Permian Gulf Coast pipeline. Energy Transfer had been working to combine that project with a competing one developed by Plains All American Pipeline and ExxonMobil to improve returns. Because of that, investors should see if the company will now join forces with Plains All American and Exxon or abandon the idea of investing in a new Permian oil pipeline.

In addition to that, investors should see if the company was successful in securing any other projects. Energy Transfer noted earlier this year that it was looking at another expansion of the Bakken pipeline as well as the Lone Star natural gas liquids (NGL) pipeline in Texas. If the company was able to lock up more projects, that could enable it to continue growing at a high rate in the coming years.

A pipeline under construction.

Image source: Getty Images.

3. Check for any more financial moves

Another area of focus for Energy Transfer has been to continue strengthening its balance sheet. The company's growing cash flow will help it achieve that aim, especially since it's on track to retain between $2.5 billion and $3 billion in cash this year after paying its high-yielding distribution to help fund expansion projects.

The company's stronger financial profile already allowed it to raise $4 billion in debt earlier this year, which it will use to refinance higher-cost borrowings and reduce interest expenses. It also raised $700 million in preferred stock to pay down even more debt.

Investors, however, should see if the company made any other moves aimed at bolstering its balance sheet, such as selling noncore assets. Energy Transfer has already said that it eventually intends to sell its stake in USA Compression Partners. While the company noted on its fourth-quarter conference call that it plans on waiting between two and four years before selling, units of that MLP are up nearly 30% this year, so it could consider starting its exit early. Likewise, the company could consider selling other noncore assets such as its stake in Sunoco, especially since units of that MLP are up double digits this year.

Expecting the good news to continue

Energy Transfer should deliver another gusher of earnings and cash flow during the first quarter, fueled by several recently completed growth projects. The company could also announce new expansions as well as more moves to shore up its financial position. If it can deliver on all three areas, that could provide it with the fuel to continue rallying this year.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.