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Energy transfer just raised guidelines. Is it time to get into these 8% profitable stocks?

Energy transfer (NYSE:ET) last week raised its full-year guidance when it reported first-quarter results, continuing the company’s recent strong operating performance. The stock has returned almost 40% in the past year, including distributions.

The Master Limited Partnership (MLP) unceremoniously halved its distribution in the fall of 2020 to better deal with its debt burden and the state of the energy market. However, the company has since turned around and just filed another solid quarterly report, which includes an increase in distribution. Its distribution is now firmly above where it was before the company shut down, which is a testament to how quickly it was able to turn itself around.

A great start to the year

As a pipeline company, volumes are of great importance for Energy Transfer and its results. On that front, the company saw volume growth across all its segments, led by a 44% increase in crude oil shipping volumes. Crude oil terminal and NGL fractionation volumes also both increased by double digits, up 11% and 10% respectively.

This led to an increase in adjusted EBITDA of almost 13% in the quarter to $3.9 billion. Distributable cash flow (DCF) to partners, which is the amount of cash the company generates before capital expenditures on growth projects (capex), was $2.4 billion, up 17% from a year ago. The company increased its payout per share by 3.3% year-over-year to $0.3175.

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The company paid $1.13 billion in distributions to shareholders in the quarter, which would bring its distribution coverage ratio to almost 2.1 times. After paying out benefits, Energy Transfer had $1.3 billion in excess cash flow and spent $461 million on growth investments in the quarter. This indicates that its distribution is currently very well covered.

Looking ahead, Energy Transfer has raised its full-year EBITDA guidance to a range of $15.0 billion to $15.3 billion, compared to a prior guidance of $14.5 billion to $14.8 billion. The new forecast reflects Sunoco LPs acquisition of NuStar Energy. Energy Transfer owns the general partnership interest, incentive distribution rights and 28.5 million common units of Sunoco. Sunoco’s results are included in Energy Transfer’s results, so the recent acquisition will help improve results.

Energy Transfer now expects to spend between $2.8 billion and $3.0 billion on growth investment projects this year. About half will go to natural gas liquids and refined product projects.

Even with the increased growth investments for the year, Energy Transfer will continue to have a lot of certainty with its distribution and room to increase it throughout the year and beyond. The updated adjusted EBITDA guidance implies a full-year DCF of at least $9 billion, while the company will spend nearly $3 billion on growth investments. Even if the distribution is slowly increased to $0.325 per share per quarter before the end of the year, approximately $4.5 billion in distributions will be paid out. That should give the country about $1.5 billion in cash to continue paying down debt.

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a natural gas pipeline through forest.

Image source: Getty Images.

A cheap share

Because approximately 90% of adjusted EBITDA comes from fee-based activities, Energy Transfer has a relatively stable and predictable business model. Through growth projects and mergers and acquisitions, the company aims for solid adjusted EBITDA growth of 11% this year. In the meantime, distribution is well covered and there is room to continue growing.

Despite this, Energy Transfer trades at an attractive enterprise value (EV)/EBITDA multiple of just 7.4 times. That’s a much lower valuation than the company was trading at before the pandemic and before distribution was halted.

ET EV to EBITDA (forward) chartET EV to EBITDA (forward) chart

ET EV to EBITDA (forward) chart

Considering that Energy Transfer has not only restored distribution but even increased it above pre-lowered levels, the stock should have solid upside potential as investors regain confidence in the company. It has an attractive yield of 8% and the distribution is well covered. Meanwhile, its balance sheet is in solid shape and the company saw the rating of its senior unsecured debt upgraded by ratings agency Fitch earlier this year.

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Given all this, Energy Transfer appears to be an attractive stock for income-oriented investors to invest in for the long term.

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Geoffrey Seiler has positions in Energy Transfer and Sunoco. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Energy transfer just raised guidelines. Is it time to get into these 8% profitable stocks? was originally published by The Motley Fool

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