Energy Transfer: A Comedy of Errors?

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Energy Transfer: A Comedy of Errors?

A thoughtful investor

Esteemed investors, let us turn our attention to Energy Transfer (ET 0.66%), a company whose fortunes, shall we say, have been subject to a rather capricious fate. It is a substantial proprietor of energy infrastructure, a network of pipelines and storage, and offers a yield of 7.5% – a tempting morsel, indeed. Yet, a discerning eye cannot help but detect a certain… instability in its character. As a portfolio manager, I find myself pondering not merely the numbers, but the very temperament of this enterprise.

The Illusion of Solidity

Energy Transfer, unlike some of its peers, is a complex beast. It not only manages its own assets, but also oversees Sunoco LP (SUN 0.02%) and USA Compression Partners (USAC 0.12%). This arrangement, while generating additional revenue, strikes me as a rather ambitious juggling act. Some might even suggest a distraction – a trifling 15% contribution to adjusted EBITDA. A prudent investor prefers a simpler, more direct narrative.

Through the first three quarters of the year, the company’s distributable cash flow comfortably covered its payouts – a ratio of 1.8 times. And while its leverage is somewhat higher than that of its rivals, at 4.2 debt-to-EBITDA, it is not, at present, cause for outright alarm. However, it does remind me of a gentleman who spends with a flourish, yet keeps a wary eye on his purse.

Looking ahead, the company has committed to $5.5 billion in capital projects for the coming year, with the expectation of 3-5% distribution growth. A laudable ambition, certainly. Yet, I find myself recalling the age-old adage: promises are like the wind, easily made, easily broken.

The Shadow of Past Indiscretions

The true difficulty with Energy Transfer lies not in its future prospects, but in its history. A conservative investor, one who values reliability and predictability, must grapple with events that transpired during previous periods of economic distress. It is a tale, I assure you, fraught with lessons for those who care to heed them.

In the year 2020, when the world reeled from the pandemic and oil prices plummeted, Energy Transfer, in a gesture that many found rather shocking, halved its distribution. The rationale – deleveraging – was, in principle, sound. But for those who had entrusted their capital to this company with the expectation of a steady income stream, it was a bitter disappointment. The distribution has since recovered, exceeding its former level, but the stain of that decision lingers, a cautionary tale for those prone to optimism.

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And let us not forget the episode of 2016, when Energy Transfer attempted to acquire Williams Companies (WMB +1.95%), only to withdraw at the last moment. The company warned that completing the deal might necessitate a dividend cut or excessive leverage. In a maneuver that struck many as rather peculiar, it issued convertible securities, with its then-CEO acquiring a substantial portion. It appeared, to some, as though the insiders were protecting themselves at the expense of the shareholders – a most unseemly spectacle.

A Question of Trust

If these past episodes give you pause, if you find yourself questioning the motives of those in command, then perhaps you should steer clear of Energy Transfer. Trust, my dear investors, is a precious commodity, and it is easily lost. Fortunately, there are alternatives in the midstream sector that offer a more tranquil path. Enterprise Products Partners (EPD 0.45%) and Enbridge (ENB +1.50%), for example, have decades of consistent dividend increases to their credit. While their yields are somewhat lower – 6.6% and 5.8% respectively – they offer a degree of stability that is, in my estimation, well worth the trade-off.

Let us remember, a wise investor does not chase the highest yield, but the most reliable one. And sometimes, the most prudent course is to simply pass on a company that seems determined to provide a constant source of amusement – and perhaps, a touch of heartache.

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2026-01-25 23:22