Energy transfer (NYSE:ET) is one of the most popular energy stocks. An important reason is the large-scale distribution of the Master Limited Partnership (MLP), which currently yields more than 8%. Furthermore, the midstream gigantic plans to enlarge it already huge payout of 3% to 5% per year.
No matter how attractive the Energy Transfer payout may be recentlyit’s not the most convincing An in the energy field. Rival MLP Western Midstream (NYSE: WES) provides an even higher payout (over 9%). Moreover, distribution has grown much faster this year. Therefore, those who like Energy Transfer’s revenue stream should too take a closer look in Western Midstream’s payout.
A high-octane revenue stream
Western Midstream currently pays a quarterly distribution of $0.875 per unit ($3.50 annually). That level is a whopping 52% higher than the previous quarter’s payment level, following a monstrous distribution increase by the MLP. In his own way recent unit price of approximately $38 eachIt offers a distribution yield of 9.2% even more attractive than Energy Transfer’s payout (recently around 8.1%).
Several factors have contributed to Western Midstream’s distribution boom. A big one is the capital recycling strategy. Western Midstream recently completed the sale of $794.8 million in non-core assets. These sales helped pay down debt from the $885 million acquisition of Meritage Midstream, which closed late last year. The very positive acquisition of Meritage Midstream gave the MLP the fuel to immediately increase distribution by $0.05 per unit to an annual rate of $2.30 per unit.
These sales of non-core assets allowed the MLP to deleverage its balance sheet, increasing its financial flexibility. It’s net leverage ratio fell to 3.3 times at the end of the first quarter. Leverage is on track to fall to or below the 3.0x target by the end of this year. That is a much lower leverage level than Energy Transfer’s target range by 4.0 to 4.5 times.
The fuel to keep growing
Western Midstream has also invested heavily Unpleasant to expand its midstream activities and support the production growth of its customers. It currently expects capital expenditures to be between $700 million and $850 million this year. It recently completed the start-up of its Mentone III factory. This project and others currently under construction will increase cash flow.
Meanwhile with a very low The leverage ratio gives Western Midstream the financial flexibility to continue making acquisitions as opportunities arise. Future deals should help boost cash flow. They have certainly contributed to the growth of Energy Transfer in recent years. Are recent acquisition of WTG Midstream will add $0.04 to cash flow per unit this year and $0.07 to operating income in 2027.
Western Midstream plans to use its growing free cash flow to support higher capital returns for its investors. That includes opportunistically buying back units and increasing their distribution in line with business growth. With earnings growing 11% this year and free cash flow rising nearly 20%, it could increase its payout faster than Energy Transfer (are targeting annual distribution growth of 3% to 5%).
A potentially even more attractive income option
Energy Transfer offers a payout of approximately 8% that is expected to grow at a low to mid-single digit annual rate. That makes it a very attractive option for investors looking for income. As attractive as that may be, Western Midstream’s payout is even higher (and has been growing faster). Therefore, those who like Energy Transfer’s large distribution should check out Western Midstream. It could generate even more revenue in the future.
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Matt DiLallo holds positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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