Investing in the oil industry is not for the faint of heart. Commodities like oil can be highly volatile in any given year. This means the companies that produce and distribute commodities see their financial position swing, without any control over the direction of oil prices.
However, where there is risk, there is potential reward. Oil stocks can be volatile, but can also produce strong cash flow and reward shareholders with high dividend yields. Energy Transfer LP (ET) is a high-yield oil stock with an 8% yield, and is an appealing stock for income investors.
Energy Transfer is an energy Master Limited Partnership, or MLP for short. In its current form, Energy Transfer is the result of a 2018 merger between Energy Transfer Equity LP (previously ETE) and Energy Transfer Partners LP (previously ETP), whereby ETE acquired all of the outstanding units of ETP. The new entity trades with the ticker “ET”.
Energy Transfer is an oil and gas transportation and storage company. It operates in the midstream segment of the oil and gas industry. It owns and operates one of the largest portfolios of energy assets in the United States. Energy Transfer also owns the general partner interests, the incentive distribution rights and 28.5 million common units of Sunoco LP (NYSE: SUN), and the general partner interests and 39.7 million common units of USA Compression Partners, LP (NYSE: USAC).
Energy Transfer has a large network of assets, with gathering capacity of nearly 13 million Btu per day of gas, as well as transportation capacity of 22 million Btu/day of natural gas and over 4 million barrels per day of oil.
Cash Flow Fuels Dividend Payout
Energy Transfer’s business model relies upon generating cash flow, which is then used to invest in growth and return distributions to investors. Last year was a record one for the company on many measures. For the fourth quarter, Energy Transfer generated record adjusted EBITDA of $2.67 billion, a 29% increase from the same quarter a year ago. Distributable cash flow also increased 29%, to a record $1.52 billion.
Going forward, Energy Transfer has an attractive lineup of new projects, which will fuel the company’s growth. For example, Energy Transfer announced it will construct a seventh natural gas liquids (NGL) fractionation facility at Mont Belvieu, Texas, with 150,000 barrels per day of capacity. Fractionator VII is scheduled to be operational in the first quarter of 2020, and is fully subscribed by multiple long-term contracts.
A collection of multiple new projects and expansions of existing projects will fuel Energy Transfer’s growth. This will allow the company to continue returning cash through high distribution payouts. Energy Transfer generated distributable cash flow of $3.69 per unit in 2018. The current distribution payment of $1.22 per unit, which equals a trailing payout ratio of 33%.
Energy Transfer has an attractive yield above 8%, and the ability to sustain the distribution over time. This makes the shares relatively attractive for yield-seeking income investors.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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