The energy midstream sector has held up better than most stock sectors during the recent market sell-off. However, that doesn't mean there aren't bargains in the space to still be found. One stock in the sector trading about 10% off its January 2025 highs is Energy Transfer (ET +0.52%).
Let's look at why the stock is a good buy while it is still trading at under $20.
NYSE: ET
Key Data Points
A better environment for energy companies
The midstream energy sector finds itself in a favorable environment at the moment. The Trump administration has made fossil fuels and increasing production a priority over green energy alternatives. Meanwhile, artificial intelligence (AI) is creating strong demand for power because running AI workloads is an energy-intensive process.
As the owner of one of the country's largest integrated midstream systems, Energy Transfer is particularly well-positioned to take advantage of increasing volumes and emerging projects. The company has a strong presence in the Permian Basin, which is the country's most important oil basin. However, it is not Permian oil from which Energy Transfer is benefiting the most.
The Permian also produces a lot of natural gas. Since this natural gas is not the primary reason companies drill this acreage, it is generally referred to as associated natural gas, and producers are often more concerned about getting rid of it than profiting from it. Producers used to flare (burn-off) much of this gas, but state environmental regulations generally have some types of limits on flaring nowadays.
While the Permian's oil pipeline systems have long been built out (overbuilt, in fact), the basin has consistently struggled to keep up with natural gas takeaway. This has led the region to have some of the cheapest natural gas prices in the country, with prices falling into negative territory at the nearby Waha hub at points last year.
Energy Transfer's system has good access to this cheap natural gas, which it can then transport to other parts of the country through its extensive system of intrastate and interstate pipelines. As such, it is not surprising that the company has gotten so much inbound interest from power companies and data centers looking to connect to its system.
Given the opportunities the company is seeing in this environment, it has upped its capital expenditure (capex) budget this year to take advantage of attractive project economics. The company has now budgeted spending $5 billion in growth capex this year as it enters a new growth-oriented phase. That's up from $3 billion in 2024.
Energy Transfer has a number of attractive projects in the works. One of its biggest is the Hugh Brinson Pipeline, which will add more natural gas takeaway from the Permian and help support the growing energy needs of data centers being built in Texas. Meanwhile, it signed a deal with data center developer CloudBurst last month to provide natural gas to an AI data center it has planned for Central Texas. The company is also directing a lot of its spending toward additional natural gas processing expansions and additions in the Permian.
In addition, Energy Transfer is looking to make a final investment decision (FID) on its long-anticipated Lake Charles LNG (liquified natural gas) project by year-end. The Biden administration had put a pause on LNG plants in 2024, which has since been reversed by President Donald Trump. At the end of last year, Energy Transfer signed a 20-year sale and purchase agreement with energy giant Chevron if the project proceeds.
This is a huge project that would help fuel even more growth for Energy Transfer in later years. The company is also a huge energy arbitrageur, being able to take advantage of regional and seasonable price discrepancies. Lake Charles would allow Energy Transfer a new outlet into international markets.
Image source: Getty Images.
An attractive valuation
At under $20, Energy Transfer's stock is cheap. Midstream companies are typically valued using an enterprise value (EV)-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) metric. The reason for this is that these are capital-intensive businesses, and, as such, the companies carry debt in order to build out their pipeline systems. Their capex spending is therefore captured in their debt, which EV takes into account.
EBITDA, meanwhile, takes out non-cash depreciation expenses. When companies spend money on capex, the upfront costs are not taken out all at once when a company reports earnings. Instead, they are spread out over the useful life of the asset, although the actual useful lives for pipelines tend to be much longer than their depreciation schedules. EBITDA takes out these non-cash costs that were already spent, as they have been captured in the company's debt.
On an EV/EBITDA basis, Energy Transfer trades at a multiple of under 8.3 times on 2025 analyst estimates.
Data by YCharts.
That is lower than most of its midstream master limited partnership (MLP) peers, as well as from a historical basis. The group, on average, carried a 13.7 times EV/EBITDA multiple between 2011 and 2016.
As such, Energy Transfer stock looks like a great buy under $20. The company is seeing one of the best growth environments it's seen for quite some time, while the stock is cheap on both a relative and historical basis. It also carries a well-covered 6.9% forward yield to boot.
