Strong crude oil prices this year have attracted investors back to energy stocks. Although oil prices have corrected a bit over the last couple of months, they are still well above $80 per barrel. Energy companies may enjoy the benefits of high oil prices in the coming months as well.

Energy Transfer (ET 0.20%) and Enterprise Products Partners (EPD) are both top companies in the midstream energy segment. Let's look at which of the two looks like a better buy right now.

Growth approaches

Both Energy Transfer and Enterprise Products Partners operate in the midstream segment of the energy value chain. Yet, the two differ significantly in terms of their growth approaches. While Enterprise Products Partners maintains a very conservative stance, Energy Transfer adapts an aggressive growth strategy. This gets reflected in the difference in the use of debt for growth by the two companies.

ET Total Long Term Debt (Annual) Chart.

ET Total Long Term Debt (Annual) data by YCharts.

Over the last 10 years, Energy Transfer's total debt rose far more than that of Enterprise Products Partners. Moreover, its debt relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA) was also historically higher than that of Enterprise Products Partners.

Kelcy Warren, Energy Transfer's Executive Chairman, is believed to have an outsized focus on growth, even if it isn't in the best interests of shareholders. The company often uses significant debt to fund its growth projects and acquisitions. While this isn't a big concern when transport volumes and earnings are high, as is the case right now, a higher debt level becomes a key concern when energy markets aren't as supportive, as happened in 2020.

Energy Transfer had to slash its distribution in 2020 when its earnings took a hit. Likewise, it resorted to a backdoor distribution cut through Energy Transfer Partners and Sunoco Logistics Partners merger in 2017 by retaining the lower per-unit distribution amount of Sunoco Logistics Partners -- the smaller of the two entities. In comparison, Enterprise Products Partners managed to grow its per-unit distribution for 24 years in a row due to its financial discipline and ample distribution coverage.

Energy Transfer expects to spend $1.8 billion to $2.1 billion on growth projects in 2022, whereas Enterprise Products expects capital expenditures of $1.6 billion for the year. 

Earnings growth

Yet, there are several things to like about Energy Transfer's stock. To begin with, its aggressive growth focus allowed it to grow its earnings faster than Enterprise Products Partners.


ET EBITDA (TTM) data by YCharts.

Although the earnings have been far more volatile, the growth rate was higher for Energy Transfer.

In the latest quarter, Energy Transfer's adjusted EBITDA rose 23% year over year to $3.23 billion. Enterprise Products Partners also grew its EBITDA by 20% to $2.4 billion. 

Which energy stock is a better buy?

Although Enterprise Products Partners' stock offers a slightly higher yield than Energy Transfer's right now, the latter has already announced its intention to raise its distribution to the pre-pandemic level. 

ET Dividend Yield Chart.

ET Dividend Yield data by YCharts.

Based on the Enterprise-Value-to-EBITDA ratio, Energy Transfer's stock looks attractive right now. Notably, Energy Transfer's stock underperformed Enterprise Products Partners over the last three- and five-year time frames in terms of total returns. That likely indicates investors' concerns about Energy Transfer's aggressive growth strategy.

In all, although Energy Transfer has delivered higher earnings growth, its higher debt levels make it more susceptible to oil & gas market volatility. That also impacts its distribution payouts. To me, with a comparable distribution yield as well as a far more stable earnings profile, Enterprise Products Partners looks like the better buy right now.