Energy Transfer Continues to Show Why It's a No-Brainer Buy for Passive Income

Energy Transfer (NYSE: ET) owns one of the largest and most diversified portfolios of energy midstream infrastructure in the country. This platform produces very stable and growing cash flows for the master limited partnership (MLP). That enables it to pay investors a lucrative and growing cash distribution (8% current yield).

That high-yielding payout is on a rock-solid foundation, which was clear in the MLP's recent first-quarter earnings report. That report also showed the company has ample fuel to continue growing its payout. These factors continue to make Energy Transfer a no-brainer buy for those seeking passive income and who are comfortable investing in MLPs, which send a Schedule K-1 Federal Tax Form each year, taking some extra work at tax time.

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Another solid quarter

Energy Transfer's diversified midstream business delivered solid first-quarter results. The MLP generated $4.1 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the period, a 5% increase from last year's first quarter. Meanwhile, it produced over $2.3 billion of distributable cash flow, down slightly from less than $2.4 billion in the year-ago period.

That was enough cash to cover its high-yielding payout with almost $1.2 billion to spare, even though it has increased its distribution per unit by more than 3% over the past year. The MLP used its excess free cash flow to fund growth capital projects (nearly $950 million in the quarter) and maintain its rock-solid balance sheet. Its leverage ratio continues to be in the lower half of its 4.0-4.5 target range.

The company delivered solid operating results across its various business segments. Crude oil transportation volumes were up 10%, natural gas liquids volumes increased by a mid-single-digit rate, and interstate natural gas transportation volumes rose 3% to a new partnership record. The MLP benefited from continued strong demand, recently completed expansion projects, and the impact of last year's acquisition of WTG Midstream.

More growth ahead

Energy Transfer's solid first-quarter showing kept it on track to achieve its full-year earnings forecast. The MLP expects its adjusted EBITDA to be in the range of $16.1 billion to $16.5 billion this year, a 5% increase from last year at the midpoint.

The company also plans to invest about $5 billion into growth capital projects this year. It recently started construction on the Hugh Brinson Pipeline, which will transport natural gas produced in the Permian Basin to market centers in Texas. The first phase of the potential $2.7 billion project should enter commercial service at the end of 2026. That's one of several major growth capital projects the company has under construction that should enter service by the end of next year. They'll provide the company with significant incremental earnings and cash flow in the 2026 to 2027 time frame.

Meanwhile, the MLP continues to make progress in securing additional growth capital projects. Last month, it signed a joint development agreement with MidOcean Energy for its Lake Charles LNG facility. MidOcean will fund 30% of the construction cost and receive 30% of the LNG production. Energy Transfer also recently signed two more commercial agreements for potential customers. This progress puts the company much closer to making a positive final investment decision (FID) on this long-delayed project. It would be a major future growth driver for Energy Transfer, supplying incremental cash flow from its retained equity stake and increased gas volumes across its legacy pipeline systems.

The MLP also continues to work on capitalizing on growing gas demand from emerging catalysts like AI data centers. It signed a deal with Cloudburst during the first quarter to supply gas to its flagship AI-focused data center development project, pending an FID by Cloudburst's customer. The company has received requests to potentially connect about 200 other data centers in 14 states and more than 60 power plants in 14 states.

Securing these and other growth capital projects would further enhance and extend Energy Transfer's long-term growth profile. They'd help further support the MLP's plan to increase its high-yielding payout at a 3% to 5% annual pace.

A steady income producer

Energy Transfer's midstream operations generate stable and growing cash flows. That enables the MLP to pay a lucrative and steadily rising cash distribution to investors. With a rock-solid financial profile and plenty of growth coming down the pipeline, it's a no-brainer buy for those seeking to collect passive income.

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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.