Energy Transfer's (ET -2.07%) stock has been on a solid run the past year, with its stock price up about 30% as of this writing. Meanwhile, the midstream energy company is set to ramp up its growth spending this year.
Let's look at the buy and sell cases for the stock to see if it is still worth buying after a solid run.
The buy case for Energy Transfer stock
Energy Transfer has arguably one of the best integrated midstream systems in North America, where it transports, stores, and upgrades various hydrocarbons. The company's large integrated system and strong presence in the Permian Basin give it a lot of arbitrage opportunities. This can be done through transporting natural gas away from a low-cost region, such as the Waha hub in Western Texas, to an area with more favorable pricing, or storing natural gas to realize better seasonal pricing in the winter. The company is also able to upgrade various natural gas liquids (NGLs) to higher-value products when the margins are favorable.
The company's large integrated system and ties to the Permian also put it in a favorable position for solid high-return growth projects, as well as potential projects related to providing the energy needed to help power artificial intelligence (AI) data centers. The Permian is the largest-growing oil field in the U.S., but a lack of natural gas takeaway has made it a source of very low-cost natural gas. This can be seen in nearby Waha hub prices, where natural gas prices even fell into negative territory at points in 2024.
As a result, the company has been receiving a lot of inbound requests related to AI data centers and recently signed its first project with data center developer CloudBurst to provide it with natural gas in Central Texas. Overall, Energy Transfer has said it has received inbound inquiries to connect to about 70 data centers in 12 states as well as 60 power plants it doesn't currently serve and 15 plants where it already has connections.
Given the general overall opportunities in front of it, Energy Transfer will ramp up its growth capital expenditure (capex) in 2025. It will look to spend $5 billion on growth projects this year, up from $3 billion a year ago, with a particular focus on projects in and around the Permian. One of its biggest projects will be the new Hugh Brinson Pipeline which will add natural gas takeaway from the Permian, transporting it to other areas of Texas to help support rising demand from power companies and data centers.
Energy Transfer is looking for mid-teen returns on its growth projects, which should translate to around $750 million in incremental annual earnings before interest, taxes, depreciation, and amortization (EBITDA) in the coming years. Much of this growth should begin to show up in 2026 and 2027 as these projects come online.
Meanwhile, Energy Transfer pays out a robust and well-covered distribution that it's looking to increase by 3% to 5%. It currently has a forward yield of 6.8%. The stock is also inexpensive from a historical standpoint, trading at an enterprise value (EV)-to-EBITDA multiple around 8, which is about half the multiple it traded at before the pandemic. EV/EBITDA is one of the most common metrics used to value midstream stocks.
Data by YCharts.
The sell case for Energy Transfer stock
While Energy Transfer is largely a fee-based business that relies on volumes, the stock can still be sensitive to energy prices and the general economy. While some of its volumes are protected by take-or-pay contracts, it can still feel an impact if overall energy demand, and thus volumes, declines. Meanwhile, there is still an overall transition to green energy away from fossil fuels, although that appears to have slowed somewhat.
The company, as previously mentioned, tends to have a large arbitrage business. However, these opportunities may not always be available to the same degree, which can lead to fluctuations in its results. This also sometimes leads to investors mistakingly thinking that the company is not getting good returns on its growth projects due to these fluctuations.
Energy Transfer also has been guilty of being too aggressive in the past. It had to slash its distribution in half during the peak of the pandemic in order to pay down debt and improve its leverage. However, it did a good job of quickly improving its balance sheet and today its distribution is higher than before it cut it.
The company's former CEO and current chairman and largest shareholder, Kelcy Warren, has also developed a reputation for being self-serving and not shareholder-friendly, especially when the company had both a publicly traded general partner (GP) and a limited partner (LP). The company's strategy mostly favored the GP, whose shares were largely held by Warren, at the expense of the LP, which was mostly held by retail investors. However, Energy Transfer is one publicly traded entity today and Warren's and other investors' interests are now aligned.
Image source: Getty Images.
The verdict on Energy Transfer
With past conflicts of interest behind it and its balance sheet in solid shape, Energy Transfer is well positioned to take advantage of growing natural gas demand stemming from AI data centers and international exports. This should lead to solid growth and an increasing distribution. Meanwhile, the stock is cheap from a historical standpoint with one of its biggest growth opportunities in front of it.
As such, I think Energy Transfer looks like a solid buy.
