Energy Transfer (ET +1.14%) is one of the largest and most diversified energy midstream companies. It owns interests in over 140,000 miles of pipelines across the country that transport crude oil, natural gas, natural gas liquids, and refined products. The master limited partnership (MLP) also owns processing plants, export terminals, and other related energy midstream infrastructure.
I own units of Energy Transfer, which is one of my favorite high-yielding investments. However, I have been taking a closer look at fellow MLP Western Midstream Partners (WES +0.34%). Here’s why those who hold Energy Transfer might want to consider its rival instead.
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A rock-solid income producer
Energy Transfer pays a very lucrative cash distribution that currently yields 8.1%. The midstream giant produces plenty of cash to cover that payout. It has generated nearly $6.2 billion of distributable cash flow through the third quarter of this year, covering the $3.4 billion it distributed to investors by a comfy 1.8 times. Energy Transfer also has a much-improved balance sheet compared to a few years ago. Its leverage ratio is now in the lower half of its 4.0-4.5 times target range. These metrics have the pipeline company in its strongest financial position in history. They also put its high-yielding payout on a rock-solid foundation.
The midstream giant’s strong financial profile enables it to invest in expanding its operations. It expects its capital spending to be around $4.6 billion this year and $5 billion in 2026. It currently has growth capital projects underway that should come online through 2029. That helps fuel the MLP’s view that it can grow its high-yielding payout by 3% to 5% per year.
NYSE: ET
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An even more bankable income investment
Western Midstream Partners offers an even higher yield at 9.3%. The MLP produces plenty of cash to cover that payout. During the third quarter, it generated $570 million of operating cash flow, which covered its distribution payment ($355 million) and capital spending ($173 million) with room to spare ($42 million in surplus free cash flow). The MLP also has a rock-bottom leverage ratio of 2.8 times.
The midstream company has been using its financial flexibility to expand its operations. It recently closed its $1.5 billion acquisition of Aris Water Systems. Additionally, it recently approved the Pathfinder Pipeline and North Loving II gas processing plant expansion projects. These investments should support continued distribution growth. Western Midstream has raised its distribution payment by 13% this year. It aims to deliver low-to-mid single-digit distribution growth in the future, with upside potential from major growth projects or acquisitions.
NYSE: WES
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A higher-octane income stream
Energy Transfer pays a lucrative cash distribution backed by a strong financial profile that should grow at a 3% to 5% annual rate in the future. It’s a great option for income-seeking investors who are comfortable receiving the Schedule K-1 Federal Tax Form that MLPs send each year. However, investors desiring more income might want to look at Western Midstream instead. It currently offers an even higher-yielding payout that could grow at a faster rate in the future.
