This year has been a very good one for Energy Transfer (ET +0.00%). Units of the master limited partnership (MLP) have rocketed nearly 40%. That has outperformed the S&P 500, which has jumped more than 25%. Several factors have fueled that rise, including an acquisition-driven earnings boost and optimism about future growth prospects. Even with that surge, units of Energy Transfer yield almost 7%, well above the S&P 500's 1.2%.
The MLP appears poised for another good year in 2025. Here's what fuels that optimistic view.
NYSE: ET
Key Data Points
Visible growth coming down the pipeline
Energy Transfer is on track to generate between $15.3 billion and $15.5 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year. That's a 12% increase from 2023's level at the midpoint. The midstream giant has benefited from a trio of acquisitions, including Lotus Midstream and Crestwood Equity Partners last year and WTG Midstream in July. It has also completed a few more organic capital projects. These catalysts helped fuel record volumes across several of its businesses during the third quarter.
The midstream giant probably won't grow quite as fast next year because it won't get the same boost from its acquisitions of Lotus and Crestwood. However, it still has plenty of momentum heading into 2025.
One factor driving that view is its more recent deal for WTG Midstream. The company expects the acquisition to add $0.04 per unit to its distributable cash flow next year, which should rise to $0.07 per unit by 2027. That's a meaningful amount. For perspective, the MLP is currently growing its high-yielding distribution at a $0.01 per unit annual rate, which is more than 3% per year.
On top of that, the company has several organic expansion projects that just entered commercial service or will over the next year. For example, it recently completed an expansion of its Orla East processing plant in the Permian Basin and a 30-mile pipeline to transport more oil from the Permian Basin to a major regional storage hub. It also expects to complete the initial phase of the Sabina 2 Pipeline Conversion project by the end of this year. Meanwhile, it anticipates completing several more projects next year, including the Red Lake IV processing plant, the relocation of its Badger processing Plant, the initial phases of its Nederland Flexport expansion project, and some of its gas-fired power plant projects. These projects will add additional sources of incremental cash flow as they enter service.
Additional potential catalysts abound
Those upcoming project completions and the highly accretive WTG Midstream acquisition set Energy Transfer up for another good year in 2025. The MLP should grow its adjusted EBITDA at a solid clip, which will allow the company to continue steadily increasing its distribution.
In addition, several other potential upside catalysts could provide the MLP with more fuel to rally next year. A big one is the potential to make another accretive acquisition. Energy Transfer is a consolidator in the midstream sector, which will likely continue in 2025. The company has a strong balance sheet; its leverage is trending toward the lower half of its target range. That gives it ample financial flexibility to make a deal if the right opportunity comes along.
Meanwhile, the company will likely continue to secure additional organic expansion projects. It recently approved the $2.7 billion Hugh Brinson Pipeline project that should enter commercial service in 2026. It has several other projects in the pipeline, including Blue Marlin, Lake Charles LNG, blue ammonia hubs, and carbon capture and sequestration projects. It's getting really close to finally approving Lake Charles LNG, which has faced a myriad of delays over the years. Meanwhile, AI could fuel several new natural gas-related infrastructure projects for Energy Transfer in the coming years.
The company's growing cash flow could enable it to start returning even more money to investors. Energy Transfer is currently increasing its distribution by $0.01 per unit each year, which is toward the low end of its 3% to 5% annual target range. It could accelerate its growth rate, especially given the accretion of the WTG Midstream deal. In addition, the MLP could start using some of its excess free cash flow to repurchase its units once its leverage ratio is at the lower end of its range. Despite this year's rally, its units still trade at an attractive valuation.
2025 is looking good
Energy Transfer has lots of momentum as it heads into 2025, having recently completed the WTG Midstream deal and a couple more organic expansion projects. The MLP could add to its already solid growth profile by securing additional expansion projects and continuing its consolidation strategy. It could also start returning even more cash to investors next year. That means it should be another good year for the MLP and its investors.
