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North American midstream master limited partnership Energy Transfer (NYSE: ET) posted record earnings in the first quarter of 2019. That's a continuation of a trend after a strong 2018 in which adjusted EBITDA rose a massive 30% year over year.
The partnership offers a huge 8.8% distribution yield that's backed by strong performance -- is now the time to jump aboard? Read this before you decide.
A transformation
Energy Transfer deserves some kudos. It wasn't too long ago that it was struggling to cover its distribution because it was forced to help prop up a controlled partnership that was facing funding issues.
It eventually combined the two businesses to simplify its structure and deal with the coverage issue. In the first quarter, meanwhile, Energy Transfer covered its distribution by an incredibly strong two times. For reference, 1.2 times is considered a good number in the limited-partnership sector.
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On top of that, the company is putting up record results with every expectation of the trend continuing. It has roughly $5 billion in capital-spending plans this year, which management projects will push adjusted EBITDA up another 12.5% in 2019, based on the midpoint of its guidance.
Although many of Energy Transfer's biggest projects will have wrapped up this year, the company continues to have growth opportunities over the longer term. Organic opportunities for expansion on top of plans for two energy export terminals suggest growth won't come to a screeching halt, even if growth does slow down some in the near term. With an over 8% yield, though, investors will be paid well to wait for the next round of projects to bear fruit.
Energy Transfer has also seen notable improvement on its balance sheet. Financial debt to EBITDA has gone from more than eight times to around 4.7 times over the past year or so. That's largely been driven by EBITDA growth, of course, but it has brought the company's leverage back down to a more comfortable range. Now consider that the yield is more than 2 percentage points above industry bellwether Enterprise Products Partners, and Energy Transfer starts to look pretty compelling.
Don't jump just yet
Although Energy Transfer appears to be a very attractive opportunity for income investors, there's one notable fly in the ointment. In 2015, Energy Transfer (technically Energy Transfer Equity, which was purchased by Energy Transfer LP in the above noted simplification transaction) agreed to buy The Williams Companies. It quickly became obvious that the company had made a mistake, and management worked to scuttle the deal it had initiated.