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Is the New Energy Transfer LP a Buy?

Matthew DiLallo, The Motley Fool

Last week, Energy Transfer LP (NYSE: ET) emerged on the scene after the former Energy Transfer Equity completed the acquisition of its affiliate Energy Transfer Partners in a unit-for-unit exchange that simplified this complex midstream franchise. The transaction also created a much stronger company that has the financial resources to fund a significant slate of expansion projects. Because of that, it's in a much better position to generate strong total returns in the coming years, making it a more compelling income stock to consider buying.

Energy Transfer LP 101

The new Energy Transfer is a behemoth in the midstream sector. It operates a fully integrated platform that spans the entire midstream value chain, with assets strategically located in all the country's top production basins. It's one of the largest natural gas gathering companies as well as a major producer of natural gas liquids (NGLs). It also operates a significant long-haul pipeline business that transports gas, oil, and NGLs from the country's major production basins to market centers. On top of that, it owns a large stake in Sunoco LP, which is one of the largest fuel distribution companies in the country.

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Energy Transfer's vast portfolio of midstream assets generates significant cash flow. Currently, the company estimates that it will haul in enough money to fund its lucrative 7.2%-yielding distribution while producing $2.5 billion to $3 billion of excess cash flow per year, which works out to a comfortable 1.6 to 1.9 times coverage ratio. That will give the company a significant portion of the funding needed to build several expansion projects.

Further, Energy Transfer expects to have a much stronger balance sheet now, with it anticipating that its leverage ratio will be around 4.0 times debt to adjusted EBITDA. That's well within the comfort zone of most midstream companies and a significant improvement from the start of last year, when leverage was a concerning 5.54 times.

Nearly unparalleled growth prospects

Energy Transfer's much-improved financial profile will make it much easier for the company to fund growth in the future. That's worth noting, since it has several major projects under construction and in development. The company's expansions run the gamut from additional oil, natural gas, and NGL pipeline capacity to more processing plants and a major NGL export terminal.

One of the biggest projects is the Permian Gulf Coast Pipeline, which will move crude from the fast-growing Permian Basin to the Gulf Coast. The company is teaming up with fellow MLPs Magellan Midstream Partners (NYSE: MMP) and MPLX (NYSE: MPLX) as well as refiner Delek US Holdings to build the 600-mile oil pipeline, which will help solve the Permian's pipeline capacity constraints. It's also an important project from a strategic standpoint for the MLPs, as it marks another step in MPLX's evolution into a more diversified midstream company while bolstering the downstream asset base of both Energy Transfer and Magellan Midstream, since crude from the pipeline will flow into their terminals near the coast.

Meanwhile, Energy Transfer has an even bigger project in development, as it's hoping to build one of the largest liquefied natural gas (LNG) export facilities in the U.S. at Lake Charles, Louisiana. The facility would have the capacity to export up to 15 million metric tons of LNG per year if built. With a projected LNG shortage expected in the coming years, this facility could help meet the market's anticipated need, which is why Energy Transfer has started to ramp up its efforts to move this project forward in recent months. It would add to an already impressive slate of expansions that the company has coming down the pipeline, which should drive strong growth rates for years to come.

There's a lot to like about the new Energy Transfer

The Energy Transfer of old was a complex midstream franchise that had a troubling financial profile, which often forced it to pay a high price to finance growth. The new Energy Transfer, on the other hand, has a much-improved financial profile that will allow it to fund a large supply of growth projects with internally generated cash flow. That tectonic shift sets it up to potentially produce lots of income and growth in the coming years, which could give it the fuel needed to generate market-beating total returns, making it a compelling stock to buy right now.

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