DALLAS – Energy Transfer LP, one of the largest players in the energy midstream sector, made waves in 2023 by completing nearly $9 billion worth of acquisitions. The master limited partnership, headquartered in Dallas, Texas, didn’t just dip its toes into the M&A waters – it dove in head first.
The two major deals were the $1.5 billion purchase of Lotus Midstream in April and the blockbuster $7.1 billion merger with fellow MLP Crestwood Equity Partners announced in May and closed in early November.
Energy Transfer’s acquisition binge in 2023 demonstrated its aggressive growth strategy of pursuing intelligent consolidation to enhance scale, synergies, and cash flows. And despite its huge outlay last year, this MLP juggernaut shows no signs of putting the brakes on its deal-making ambitions as it enters 2024.
Crestwood Merger Delivers Immediate Impacts
The marquee transaction of Energy Transfer’s 2023 M&A activity was its $7.1 billion merger with Crestwood Equity Partners. This combination created an even larger midstream colossus with enhanced scale, diversification, and financial strength.
In Energy Transfer’s Q4 2023 earnings call, co-CEO and CFO Tom Long highlighted the Crestwood integration is progressing extremely well so far. “Integration of the combined operations has been going very smoothly,” Long stated. “We were able to hit the ground running on realizing synergies.”
While not originally announced until May, Crestwood’s assets were a significant contributor to Energy Transfer’s record operational achievements in 2023. The post-merger entity set new highs in several key metrics including natural gas gathering, processing, and transportation volumes.
Beyond superior operational results, the Crestwood deal is already delivering significant financial benefits ahead of initial expectations. Energy Transfer now forecasts capturing $80 million in annual cost synergies by 2026, double the $40 million originally projected. This includes $65 million slated to be realized in 2024 alone as integration progresses.
On top of cost savings, Long emphasized Energy Transfer is proactively “identifying and evaluating a number of commercial and operational synergies.” These initiatives are aimed at further streamlining the combined asset footprint to enhance efficiency, utilization, and profit generation. Examples could include optimizing pipeline flows, consolidating redundant facilities, and prioritizing higher-return expansion projects to best leverage the unified network.
The Crestwood merger, with synergy attainment progressing rapidly, is viewed as a prime catalyst supporting Energy Transfer’s guidance for approximately 7% earnings growth in 2024. And the identified upside potential from additional integration-driven synergy captures positions Energy Transfer for sustained earnings and distributable cash flow growth in the years ahead.
Outlining Criteria for Continued Consolidation
Given the scope of the recently consummated Crestwood merger, an analyst on the Q4 earnings call asked if Energy Transfer might be in a digestive period focused on integration before pursuing further deals. Long’s response indicated the MLP has no intention of slowing its strategic M&A momentum.
Long reiterated Energy Transfer has consistently believed the fragmented midstream space offers sensible consolidation opportunities. This view has been validated by increasing merger activity over the past year that is likely to continue. “We’re going to continue to evaluate opportunities,” Long affirmed.
He then articulated the key factors Energy Transfer evaluates in any potential acquisition:
- Disciplined Approach to Valuation: Energy Transfer is focused on making prudent purchases at prevailing market values rather than paying large premiums common in corporate takeovers.
- Accretive and Deleveraging: Any deal must be immediately accretive to Energy Transfer’s distributable cash flow. It must also further strengthen the balance sheet, not undermine progress on deleveraging efforts.
- Solid Strategic Fit: Assets acquired should logically complement and integrate well with Energy Transfer’s extensive existing midstream network of pipelines, processing plants, storage facilities and more across multiple basins and regions.
If it’s a good value, accretive, deleveraging, and a strategic fit, Energy Transfer would be interested in doing another deal,” Long summarized.
With its financial standing continuing to improve, including projected 2024 leverage in the lower half of its 4.0-4.5x target range, Energy Transfer appears unencumbered to act decisively on opportunistic acquisitions fitting its strict criteria. And the smooth progression of the Crestwood integration augurs well for its capabilities to efficiently digest future transactions as well.
Energy Transfer’s Position as an Enduring Industry Consolidator
Energy Transfer has cemented itself as a prolific consolidator in the North American midstream sector through diligent M&A strategy over a period of decades. Its moves in 2023, while substantial, represent the continuation of a proven approach.
Despite the scale of the $1.5 billion Lotus deal and the $7.1 billion Crestwood merger last year, Energy Transfer has made clear it has no intention of letting up on its intelligent pursuit of growth through consolidation.
As Long articulated, as long as the valuation is prudent, the combination is accretive to cash flow, further progress is made on balance sheet deleveraging, and the strategic fit is sound – Energy Transfer will remain interested in doing additional deals.
With its financial profile and balance sheet continuing to strengthen and the Crestwood integration progressing ahead of plan, there appear to be no material obstacles impeding further opportunistic transactions in 2024 if suitable targets emerge.
Accretive acquisitions in the wake of the Crestwood success have the potential to provide supplemental uplift to Energy Transfer’s distributable cash flow growth. This could support the partnership’s distribution growth targets in the 3-5% annual range while solidifying its 8.7% yield as one of the most attractive in the MLP universe. A combination of prudent external growth with diligent cost management and operational execution can enhance Energy Transfer’s trajectory.
As one of the largest and most diversified midstream enterprises, spanning multiple basins and commodity streams with irreplaceable critical infrastructure, Energy Transfer’s proactive yet selective consolidation strategy leaves it ideally positioned to potentially benefit from even greater scale and synergies through further opportunistic deals.
Whether 2024 activity reaches the $9 billion level of 2023 remains to be seen. But there is no doubt Energy Transfer will be front and center evaluating future intelligent acquisition prospects primed to move the needle on its quest for sustained distribution growth and unitholder value creation.
