Energy Transfer LP (NYSE:ET) Q1 2023 Earnings Call Transcript

Energy Transfer LP (NYSE:ET) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Hello, and welcome to the Energy Transfer Q1 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded. And now, I’d like to turn the conference over to your host today, Tom Long. Sir, please go ahead.

Tom Long: Thank you, operator. Good afternoon, everyone, and welcome to the Energy Transfer first quarter 2023 earnings call. I’m also joined today by Mackie McCrea and other members of the senior management team who are here to help answer your questions after our prepared remarks. Hopefully, you saw the press release we issued earlier this afternoon as well as the slides posted to our website. As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are based upon our current beliefs as well as certain assumptions and information currently available to us and are discussed in more detail in our Form 10-Q for the quarter ended March 31, 2023, which we expect to file this Thursday, May 4.

I’ll also refer to adjusted EBITDA and distributable cash flow or DCF, both of which are non-GAAP financial measures. You’ll find a reconciliation of our non-GAAP measures on our website. I’d like to start today by going over our financial results. We were pleased with our results for the first quarter of 2023. During which we generated adjusted EBITDA of $3.43 billion, which was up from $3.34 billion for the first quarter of 2022. Results for the first quarter benefited from record volumes across our interstate and midstream segments, as well as through our NGL pipelines and NGL and refined products terminals, which included a record amount of LPGs exported out of our Nederland terminal and a record amount of ethane exported out of both Netherlands and Marcus Hook terminals during the quarter.

DCF attributable to the partners of Energy Transfer, as adjusted, was $2.01 billion compared to $2.08 billion for the first quarter of 2022. This resulted in excess cash flow after distributions of $1.04 billion. On an incurred basis, we had excess DCF of $64 million after distributions of $967 million and growth capital of $407 million. On April 26, we announced a quarterly cash distribution of $0.3075 per common unit or $1.23 on an annualized basis. This distribution represents an increase from $0.3050 per common unit paid for the fourth quarter of 2022. Although we cannot guarantee future performance, we expect to make ongoing quarterly increases to our common unit distribution of a $0.0025 on a quarterly basis or $0.01 on an annualized basis and we are now targeting 3% to 5% annual distribution growth rate.

This targeted growth rate allows us to provide some clarity to our equity holders on future distributions. We continue to balance our leverage reduction and increasing equity returns, all while maintaining sufficient cash flow to invest in our incredible backlog of growth opportunities. Inclusive of the targeted distribution growth rate, we still expect to be at the lower end of our 4 times to 4.5 times leverage ratio target range going forward based on our calculation of the rating agencies’ leverage ratios. As of March 31, 2023, the total available liquidity under our revolving credit facility was approximately $3.01 billion. Now turning to results by segment for the first quarter, I’ll start with NGL and refined products. Adjusted EBITDA was $939 million compared to $700 million for the same period last year.

This change was primarily due to higher margins from transportation, fractionation, storage and terminal services, as well as an increase in northeast blending and optimization. Also included in the increase was approximately $50 million from the recognition of gains on hedged NGL inventory which is primarily related to the physical loss recorded in the third quarter of last year. NGL transportation volumes on our wholly owned and joint venture pipelines increased 13% to a record 2 million barrels per day compared to 1.8 million barrels per day for the same period last year. This increase was primarily due to higher volumes from the Permian region and our Mariner East pipeline system, as well as on our NGL pipelines that deliver into our Nederland Terminal.

Average fractionated volumes increased 18% to an average 949,000 barrels per day compared to 804,000 barrels per day for the first quarter of 2022. NGL export volumes grew more than 20% over the first quarter of 2022, driven by record ethane and LPG exports out of our Nederland Terminal as well as record ethane exports out of the Marcus Hook terminal. This was primarily driven by the second tranche of satellite’s contract going into effect on July 1, as well as increased international demand for natural gas liquids. In the first quarter, we loaded more than 14 million barrels of ethane out of Nederland. In total, we continue to export more NGL than any other company or country with our percentage of worldwide NGL exports remaining at approximately 20% of the global market.

For midstream, adjusted EBITDA was $641 million compared to $807 million for the first quarter 2022. This was primarily due to the lower natural gas and NGL prices, as well as increased operating expenses, which were partially offset by increased throughput in all of our operating regions. In addition, the first quarter of 2023 included a onetime positive adjustment of approximately $40 million. Gathered gas volumes increased 14% to a record 19.8 million MMBtus per day compared to 17.3 million MMBtus per day for the same period last year. For the crude oil segment, adjusted EBITDA was $526 million compared to $593 million for the same period last year. This was primarily due to lower volumes on the Bakken Pipeline and lower optimization gains compared to the first quarter of 2022.

The reduction in optimization was entirely attributable to the timing differences between physical and financial settlements. We expect to recognize $25 million gain in the second quarter related to this activity. In addition, the first quarter of 2023 included a onetime negative adjustment of approximately $35 million. These were partially offset by higher throughput on several of our pipeline systems and higher export demand. Crude oil transportation volumes were 4.24 million barrels per day compared to 4.22 million barrel per day for the same period last year. This was a result of higher volumes on our Texas pipeline systems and the Bayou Bridge pipeline, as well as placing the Ted Collins Link pipeline into service in the second quarter of 2022, which were offset by lower volumes on the Bakken Pipeline as a result of weather related production impacts.

In the Interstate segment, adjusted EBITDA was $536 million compared to $453 million for the first quarter of 2022. This was due to increased transportation revenue related to higher contracted volumes and rates on several of our wholly owned and joint venture pipelines, as well as placing the Gulf Run Pipeline into service in December of 2022. Volumes increased 11% over the same period last year due to the Gulf Run pipeline being placed into service, as well as higher utilization on many of our Interstate pipelines, including Transwestern, (ph), Trunkline, MEP and (ph). And for our Intrastate segment, adjusted EBITDA was $409 million compared to $444 million in the first quarter of last year. This was due to lower pipeline optimization opportunities and decreased retained fuel revenues related to lower natural gas prices, which were partially offset by increased storage optimization opportunities and higher fees on assets in the Haynesville and Oklahoma.

Utilization on our EOIT, HPL and Rig Systems increased due to higher demand from gas takeaway from growing production in a number of our operating basins. Looking briefly at recent developments, we are excited about the closing of our acquisition of Lotus Midstream for approximately $900 million in cash and 44.5 million Energy Transfer common units. Lotus owns and operates (ph) Pipeline, a fully integrated crude pipeline terminal system in the Permian Basin. This acquisition will enhance Energy Transfer’s crude pipeline footprint across the Permian Basin with the addition of approximately 3,000 miles of crude gathering and transportation lines that extend from Southeast Mexico to Cushing, Oklahoma. In addition, the assets provide direct access to other major hubs including Midland, Colorado City, Wink and Crane, and will increase our storage capacity at Midland by approximately 2 million barrels per day.

Now turning to our growth projects. I’ll start with an update on our Lake Charles LNG project. In May 2022, we received an extension from FERC of the deadline for completion of the construction of Lake Charles LNG facility to December of 2028. And in June 2022, we applied to the Department of Energy. As many are now aware, on April 25, the Department of Energy denied our request for this extension. We strongly disagree with this decision and we plan to file an appeal with the DOE within 30 days of the DOE decision. Now turning to Nederland and Marcus Hook export terminals. NGL demand both in the U.S. as well as from international customers continues to increase. We are bullish that there will be significant growth in the international demand for many years to come and we are well positioned to benefit from that demand.

In order to address this growth, we have recently FID and expansion to our NGL export capacity at Nederland which we expect to add up to 250,000 barrels per day of export capacity. This expansion which is projected to cost approximately $1.25 billion will give us tremendous flexibility to load different products as well as new products based upon customer demand and market dynamics at the time. The expansion is expected to be in service in mid-2025. We look forward to providing more specifics on this expansion in the near future. We also continue to pursue an optimization project at our Marcus Hook Terminal would add incremental ethane refrigeration and storage capacity. Next at Mont Belvieu, fractionation throughput averaged over 1 million barrels per day for the month of April, which is a new monthly record.

And we continue to expect frac eight to be in service in the third quarter of 2023. This addition will bring our total Mont Belvieu fractionation capacity to approximately $1.15 million barrels per day. And in the Delaware Basin, we placed our 200 million cubic foot per day Grey Wolf processing plant into service in December of 2022. As a reminder, this plant is supported by new commitments and growth from existing customer contracts. And construction continues on the Bear plant, our eighth 200 million cubic foot per day processing plant in the Delaware Basin. This plant remains on schedule to be in service in the second quarter of 2023. In addition, we continue to evaluate the necessity and potential time of adding another processing plant in the Permian Basin.

Regarding Permian takeaway, we also completed modernization and debottlenecking work on our Oasis pipeline during the first quarter, which added at least an incremental 60,000 Mcf per day of takeaway capacity out of the Permian Basin. We also placed the Gulf Run pipeline into service in December of 2022. Gulf Run provides natural gas transportation between our upstream pipeline network and from the Haynesville, Shell for delivery to the Gulf Coast connecting some of the most prolific natural gas producing regions in the U.S. with the LNG export market, as well as many markets along the Gulf Coast. We were already utilizing a significant portion of Zone 1 capacity on Gulf Run and we have added additional customer commitments through Zone 2, which is being delivered into our trunk line pipeline.

In addition to these ongoing projects, we continue to evaluate a number of other potential growth projects that over the long term could provide strong returns and significant upside to our business. We remain optimistic that we can bring these projects to FID and will share any significant updates on these potential projects at the appropriate time. One the Alternative Energy front, we continue to make progress on our carbon capture and storage project with CapturePoint that is related to our north Louisiana treating plants. A Class 6 permit for this sequestration site was filed by CapturePoint with the EPA in June of 2022. Also we recently executed a letter of intent with Oxy related to Oxy’s Magnolia hub in Allen Parish, Louisiana, north of the Lake Charles Industrial Complex.

Pursuant to the letter of intent, Energy Transfer and Oxy are working together to obtain long term commitments of CO2 from industrial customers in the Lake Charles, Louisiana area. If this project reaches FID, Energy Transfer would construct a CO2 pipeline to connect the customers in Oxy’s sequestration site in Allan Parish, Louisiana. Now looking at our growth capital project for the first quarter ended March 31, 2023, Energy Transfer spent $407 million on organic growth projects, primarily in the midstream and NGL and Refined Products segment, excluding SUN and USA Compression CapEx. For full year 2023, we now expect growth capital expenditures to be approximately $2 billion, which will be spent primarily in the midstream, NGL and refined products and Interstate segments.

This capital outlook has been updated to include the NGL export expansion project at Nederland, as well as the expenditures related to the Lotus acquisition. A significant amount of our 2023 growth capital spend is comprised of projects that are expected to be online and contributing cash flow before the end of 2023 at very attractive returns, including frac 8, the Bear processing plant and new treating capacity in the Haynesville. Now for our adjusted EBITDA guidance, we are updating our guidance to include EBITDA associated with the Lotus acquisition. As a result, we now expect our 2023 adjusted EBITDA to be between $13.05 billion and $13.45 billion. As a reminder, with the current forward curve for commodity prices and spreads, our guidance does not assume the same upside benefits from pricing and spreads that we experienced in 2022.

Our base business continues to provide stable cash flows and demonstrates our ability to operate through various market cycles and we expect utilization in all of our core segments to increase. In addition, we continue to create opportunities for optimization and expansion driven by sustained domestic and international demand for our products and services. We remain bullish about the future of our industry and the growing worldwide demand for all of our products. As part of our capital allocation strategy, we will continue to look for new ways to address this demand through the pursuit of strategic growth projects that enhance our existing asset base and generate attractive returns. In addition, we will continue to place emphasis on strategically allocating cash flow in a manner that balances our targeted 3% to 5% annual distribution growth rate and our commitment to our 4 times to 4.5 times leverage target, all while maintaining significant free cash flow for growth.

This concludes our prepared remarks. Operator, please open the line-up for our first question.

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Q&A Session

Operator: Yes, thank you. At this time, we will begin the question-and-answer session. And the first question comes from Michael Blum with Wells Fargo.

Michael Blum: Hey, good afternoon. Thanks everyone. I’m wondering if you can break down how much of the EBITDA guidance the increase of $150 million. Is that due to Lotus versus just better performance in the base business?

Tom Long: Yeah. Michael, this is Tom. Majority of it clearly was the Lotus acquisition, but I will say with strong performance you saw in the first quarter, we were able to bump that up a little bit, but it’s a smallest piece of the bump. So it’s great to be able to continue to increase it and obviously very excited about the contribution of Lotus as we got that one closed in fairly short over. So…

Michael Blum: Great. And then just want to get a little more insight into the change in distribution policy. It seems like last quarter or certainly last few quarters you were thinking more once a year and now you’re going to this quarterly distribution? And then can you talk a little bit about what would drive the range from between 3% and 5%? Thanks.

Tom Long: Yes, Michael, we clearly have very good discussions with our directors every quarter and you can hopefully translate from this the strength of our business and the ability to be able to continue to grow our distributions. And when we looked at it and had the discussion on it, we decided that we would just continue to bump on a quarterly basis. And the 3% to 5% when you really kind of look out forecast, we all wish we had the perfect crystal ball. But we thought that was a good sustainable target to put in. But keep in mind, we will always continue to evaluate this distribution level on a quarterly basis. So maybe you’ll be asking this question again as we get into the next quarter. But after good dialogue, I will say that it’s great to be here and great to be in the position that we can see leverage coming down and all these growth opportunities in funding them. At the same time to be able to grow distribution. So it’s a great place to be.

Michael Blum: Great. Thank you.

Operator: Thank you. And the next question comes from Brian Reynolds with UBS.

Brian Reynolds: Hi, good morning, everyone. Maybe as a follow-up to the guidance question, but maybe a focus on spread opportunities. On the last call, you kind of highlighted $400 million to $600 million of spread opportunities across the business. But now with the Lotus acquisition, you have a new market with future opportunities in the future. So kind of curious if you can just update us on just kind of base business spread opportunities for the balance of the year, particularly on the crude side? Thanks.

Mackie McCrea: Yes. This is Mackie. When you say spread opportunities, they’re numerous exactly what you’re talking about.

Brian Reynolds: I guess, just focused on the base — focused on the base business with nat gas opportunities and then in relation to Lotus as well just given new market opportunity?