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Energy Transfer (NYSE: ET) recently closed its $7.1 billion all-equity merger with fellow master limited partnership (MLP) Crestwood Equity Partners. The deal created an even larger-scale player in the energy midstream sector, with ownership interests in more than 125,000 miles of pipelines and related assets across 41 states. It will also enhance Energy Transfer’s cash flow, giving it more money to pay distributions.

I owned both MLPs before their merger. With the all-equity deal now closed, I have a much larger position in Energy Transfer, which has become my top source of investment income. Here’s why I’m excited to bolster my position in the income-producing MLP.

A lower-risk income stream

I built up a sizable position in Crestwood Equity Partners over the years. The midstream company focused on operating gathering and processing (G&P) assets in three core oil and gas producing regions (The Williston, Powder River, and Delaware basins). It also had strategically located storage and logistics assets around the country. These businesses generated relatively stable cash flow backed by long-term contracts with oil and gas producers, which paid fixed fees as volumes flowed through Crestwood’s network.

Those assets generated relatively stable and growing cash flow. That gave Crestwood the money to pay a lucrative cash distribution while investing in expanding its operations to increase its cash flow. That cash distribution was a big reason why I invested in Crestwood. The payout has been very stable over the years I owned units in the MLP.

While I liked Crestwood’s steady income, it was riskier than some of my other income-focused investments because of its smaller scale and focus on the more volatile G&P segment. That’s why I was happy to see it merge with a larger player in the midstream sector. Energy Transfer is one of the premier players in the space, with a much more diversified business model, a strong investment-grade balance sheet (something Crestwood lacked), and a large backlog of expansion opportunities. Those features help reduce risk, making my income from the combined entity much safer.

Visible growth

While Crestwood provided lots of income stability over the years, it lacked distribution growth. The MLP had only increased its distribution twice since resetting its payout in 2016, boosting it by 9.2% overall. Instead of growing its payout, Crestwood used its excess cash to strengthen its balance sheet and expand its operations through organic capital projects and acquisitions.

Energy Transfer has done a better job growing its payout overall. While the MLP cut its distribution by 50% during the pandemic to retain additional cash for debt reduction, it slowly returned the payout to its pre-pandemic level as it reached its targeted leverage ratio. It achieved that goal last year and has since set a new target of increasing its distribution by 3% to 5% per year. The company has been steadily raising its payout each quarter.

Acquisitions like Crestwood will help Energy Transfer achieve its distribution growth strategy. The deal is immediately accretive to its distributable cash flow per unit. In addition, the company expects to capture at least $40 million of annual cost savings from the merger, increasing its future cash flow. The MLP has a long history of completing accretive acquisitions, including already closing a $1.5 billion deal for Lotus Midstream earlier this year, which was also immediately accretive to its cash flow.

Expansion projects are Energy Transfer’s other growth driver. The MLP plans to invest about $2 billion into high-return projects this year. Meanwhile, it sees capital spending averaging between $2 billion and $3 billion annually over the coming years. It has a large pipeline of compelling growth opportunities under development. These projects will grow its cash flow, helping support its plan to steadily increase its distribution.

A much stronger and growing income stream

Energy Transfer’s acquisition of Crestwood Equity Partners has made it my top source of investment income. I’m thrilled with that outcome because the deal enhanced Energy Transfer’s scale and cash flow, making that income stream much safer. Meanwhile, it increases the company’s ability to grow its payout in the future, meaning it should supply me with even more income in the coming years.

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Matthew 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.

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