Energy Transfer (NYSE: ET) has stomped on the growth accelerator this year. The midstream giant’s distributable cash flow surged 32% in the second quarter. Acquisitions were the main fuel source, as it closed a couple of needle-moving deals in the past year. It also completed several more expansion projects
The master limited partnership (MLP) is getting closer to locking down another major growth driver. It recently signed a preliminary deal to build its proposed Lake Charles liquified natural gas (LNG) plant. The company could get a big boost from building that facility.
Another step closer to finally coming to fruition
Energy Transfer signed a preliminary contract with a consortium to build its proposed Lake Charles LNG project. The agreement is subject to the MLP making a final investment decision (FID) on the project. It’s currently working to secure regulatory approval and additional partners for the project.
The midstream giant has been working on the project on and off for nearly a decade. It has experienced several setbacks along the way, including challenging market conditions and the loss of its joint venture partner, Shell. The most recent speed bump was a denial by the Department of Energy of its request for a second extension to export LNG to countries that don’t have a free trade agreement with the U.S.
Energy Transfer has been steadily working to overcome its obstacles. It has signed several commercial agreements with LNG buyers, including Shell, for most of the project’s proposed 16.5 million tons of annual export capacity. It’s also working to bring in new joint venture partners to help fund the facility’s construction and has reapplied for an export permit.
A potential needle-moving project
Energy Transfer still has a lot of work to do before it can make an FID on Lake Charles LNG. However, it would significantly enhance its future growth profile if it can finally push that project over the finish line.
The project would provide two notable benefits for the MLP. First, it would earn stable cash flow from its retained interest in the export facility. The company has been looking for financial and strategic partners willing to fund up to 80% of the equity in the project, which would leave the company with a 20% interest. Given the size of the facility, that minority stake would still produce a meaningful amount of stable annual cash flow.
In addition, the project will have a major impact on its natural gas pipeline operations. The facility will use a significant amount of feed gas, which Energy Transfer will transport to the liquefaction plant via its extensive pipeline system. Energy Transfer noted in a regulatory filing that, “Upon completion of the LNG project, we expect to realize significant incremental cash flows from transportation of natural gas on our Trunkline pipeline system, and other Energy Transfer pipelines upstream from Lake Charles.”
While it will be many years before the company sees a return on its investment, given the long construction timeline, it will provide the MLP with more visibility into its future cash flows by enhancing and extending its growth outlook. Energy Transfer currently has projects on track to enter service through 2026. In addition, it has several other large projects under development, which could significantly enhance and extend its growth outlook. Securing Lake Charles LNG and other expansion projects would give the MLP more fuel to increase its distribution in the future.
Getting closer to finally making an FID
Energy Transfer has been working to move forward with a project to convert its Lake Charles facility from imports to exports for nearly 10 years. It’s taking another notable step toward finally breaking ground on that project by signing a preliminary agreement with a consortium of construction contractors. While it has a few more things to do before it can push the project over the finish line, it’s getting really close. Finally moving forward with the project will remove a lot of overhang while significantly enhancing the company’s long-term growth outlook. Because of that, it remains an important project for investors to monitor.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Energy Transfer Takes a Preliminary Step Toward Adding a Lot More Fuel to Its Growth Engine was originally published by The Motley Fool
