The energy sector is often out of favor among many investors, but suddenly comes into focus at certain moments. Left for dead during the pandemic, energy prices spiked in 2022 following the pandemic reopening and Russia's invasion of Ukraine, before subsiding.
Now, electricity generation capacity is back on investors' radars as AI data centers have increased the demand for electricity in a way not seen for a couple decades.
The following two stocks stand to benefit handsomely from this shift in the demand outlook, yet trade at bargain-level single-digit multiples today.
NYSE: ET
Key Data Points
Energy Transfer
Energy Transfer (ET 1.01%) is a master limited partnership that owns over 20,000 miles of pipeline for the transportation of natural gas, natural gas liquids, crude oil and refined products, along with gathering and processing assets across the U.S. Geographically, Energy Transfer dominates the U.S. midstream industry in Texas and the Gulf coast, up through the Midwest to the Bakken in North Dakota to the west and to Michigan to the east.
The distribution yield on Energy Transfer is currently a hefty 6.6%, but make no mistake, Energy transfer is now a growth company. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) grew 8% in the fourth quarter 2024, and management projects another 5% growth in 2025. But growth could reaccelerate in 2026 and beyond, as management also just upped its forecast for growth-oriented capital expenditures to $5 billion in 2025, up a whopping 67% from the $3 billion spent in 2024. The profit returns from those projects will occur after this year.
That big capex increase mirrors the increases cloud hyperscalers have announced to support their AI data center buildout in the year ahead, and a lot of Energy Transfer's growth spending is actually going toward that same buildout.
In fact, Energy Transfer's management noted it had received requests to connect its natural gas pipelines to 70 new data centers across 12 states. Specifically, Energy Transfer just signed an agreement with private data center operator CloudBurst to supply up to 450,000 MMBtu/d of natural gas "behind the meter" -- or, bypassing the electricity grid -- directly to Cloudburst's data center complex in San Marcos, Texas.
Despite its hefty yield and prospects for AI-powered growth, Energy Transfer only trades for around eight times last year's distributable cash flow.
That combination of growth, high dividends, and a cheap valuation makes Energy Transfer a name to buy amid the AI data center buildout.
TotalEnergies
France's TotalEnergies (TTE +0.00%) has a similar large, geographically diversified and molecule-diversified portfolio to U.S. oil and gas giants. However, Total has a couple key differences, too. One, TotalEnergies is taking some of its profits and investing in renewable electricity generation and distribution to a greater extent than its U.S. peers. Two, the stock is much cheaper than its U.S.-domiciled peers as well.
Shares currently go for just around 9 times trailing earnings and just 7.6 times forward earnings expectations. This is in spite of TotalEnergies having lower leverage than most oil and gas majors, with just $10.9 billion in net debt on top of its $136 billion market cap.
Total is well-diversified across upstream oil & gas production, integrated liquified natural gas (LNG) exports and imports, integrated electricity generation and distribution, downstream refining, and energy trading. Altogether, these segments brought in $29.9 billion in operating cash flow in 2024, of which a whopping $15.7 billion was returned to shareholders, with $8 billion going toward share buybacks and $7.7 billion going toward the company's 5.6% and growing dividend.
The combined shareholder return amounts to an 11.5% yield at today's share price. And because Total's valuation is so low, the company was able to lower its share count by 5% last year while still making investments and keeping a strong balance sheet.
Total may get its big 30-40% discount to U.S. oil majors because it's a European stock that's heavily taxed, and it has been reinvesting in renewable energy, which draws skepticism. But Total's portfolio spans the entire world, including assets in the U.S., such as partial ownership of several U.S. LNG export facilities. Second, Total's earnings are recorded after tax, so that shouldn't be a factor in valuing the company on after-tax earnings.
Finally, while Total's renewable energy and power portfolio has traditionally earned lower returns on capital than oil and gas operations, those returns are increasing. In 2024, Total earned a 10% return on capital employed in its integrated power portfolio, up from 7% in 2021, and getting close to the mid-teens company average.
So, there isn't really a good reason for Total's discount to U.S. integrated players that trade at mid-teens earnings multiples. That makes this diversified energy giant another smart energy investment today.
