Energy Transfer Earnings: Growth Remains Front and Center While Lake Charles LNG Is Stalled

Energy Transfer Stock at a Glance

• Fair Value Estimate: $17.50
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: None

Energy Transfer Earnings Update

Energy Transfer’s ET second-quarter results met our expectations, which included reaffirming the midpoint of its 2023 earnings at $13.3 billion. After updating our model, we will maintain our $17.50 fair value estimate and no-moat rating. Second-quarter earnings fell to $3.1 billion from $3.2 billion last year. Volume growth across the company’s portfolio was more than offset by weaker gas and natural gas liquids pricing, which were down 70% and 45%, respectively, from last year’s levels.

Energy Transfer remains more exposed to oil and gas price volatility than most within our U.S. midstream coverage, given its propensity to rely on marketing spreads for earnings, so we would expect more of the same in the second half of 2023.

Despite the Lotus deal completed in May, Energy Transfer is working on its next round of growth projects and capital allocation. Growth capital spending (excluding the acquisition cost of Lotus) is expected to be about $2 billion this year, matching our view. However, Energy Transfer highlighted its desire to spend up to $3 billion or more over the long run on the conference call, exceeding the top end of its guided $2 billion to $3 billion range. Given that historical returns on capital have been poor, we remain skeptical of the partnership’s ability to drive excess returns.

The Lake Charles liquefied natural gas project remains somewhat stalled. The Department of Energy denied Energy Transfer’s request for a deadline extension for the completion of the facility (currently set for December 2028) in April, and then again at a rehearing in June. As a result, the firm intends to file a new export authorization for the project in August. This likely will mean further substantial delays until a final investment decision, as the project would essentially go to the back of the line for permit approval behind multiple U.S. LNG projects that have already applied.

Finally, the annual distribution growth looks to slow from its recent breakneck pace after a number of sizable increases. The annual distribution recently exceeded management’s targeted $1.22 per unit, and it is expected to be about $1.25 per unit for 2023. Future distribution increases are forecast to be about 3%-5% annually. Despite the stock’s undervaluation, buybacks remain nonexistent and are not management’s priority.