One of my favorite pipeline stocks to buy right now is Energy Transfer (ET 1.42%), and investors can pick up the master limited partnership (MLP) on sale, with shares trading down nearly 20% from their high as of this writing. In fact, the stock is one of my largest holdings.
Here's why Energy Transfer is a great stock to buy and hold for the long term.
High yield with growing growth opportunities
Energy Transfer has built one of the largest integrated midstream systems in the U.S., handling the transport, storage, and processing of natural gas, crude oil, natural gas liquids (NGLs), and refined products. Its scale enables it to benefit from rising volumes across the energy value chain, as well as take advantage of price spreads across regions, seasons, and products. For instance, natural gas prices often rise in winter and can vary across the country. Energy Transfer can profit by storing gas ahead of periods of peak demand or by moving it from lower-priced to higher-priced markets. The company also upgrades certain hydrocarbons into more valuable end products.
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This kind of integrated footprint is hard to replicate, and it makes growth opportunities easier to take advantage of. With a strong position in Texas and the Permian Basin, Energy Transfer has access to low-cost associated gas, putting it in a solid spot to benefit from trends like the country's rising liquefied natural gas (LNG) exports and growing electricity demand tied to the AI infrastructure build-out.
Given the opportunities in front of it, Energy Transfer has transitioned into growth mode. It plans to spend around $5 billion in growth capital expenditures (capex) this year, up from $3 billion in 2024. One of its major projects is the Hugh Brinson pipeline, which will transport natural gas out of the Permian to help meet growing natural gas demand in Texas stemming from new AI data center construction. It also signed a deal with data center developer Cloudburst to directly provide natural gas to its AI-focused data center development in central Texas. The company has also received inquiries from more than 60 power plants regarding new connections in 14 states, and requests from more than 200 data centers.
Energy Transfer also appears ready to make a final investment decision on its long-awaited Lake Charles, Louisiana, LNG facility. It signed a deal with MidOcean Energy to fund 30% of the project's construction costs in exchange for 30% of the facility's LNG production if the project goes through, while it has also signed several sale and purchase agreements with potential customers. Demand for LNG continues to grow rapidly, with much of the new demand coming from Asia. Shell recently projected that global LNG demand could climb by 60% by 2040, driven both by Asian growth and a broader push for lower-emission energy sources for segments like heavy industry and transportation.
Energy Transfer is also in a strong financial position. Building pipelines and other midstream assets is a capital-intensive business, and in 2020, the company cut its distribution in half to reduce leverage and improve its balance sheet. However, its distribution is now above where it was before that cut, and its leverage ratio is toward the low end of its target range of 4 to 4.5 times its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). In fact, the company recently said it was in the best financial shape in its history.
On top of its solid balance sheet, the MLP is also in a good position from a contract standpoint. This year, it expects about 90% of its EBITDA to come from fee-based services, meaning it's largely insulated from swings in commodity prices and spread differentials. Additionally, the company said it now has its highest-ever percentage of take-or-pay contracts, which means it gets paid whether or not customers actually use its services. Fee-based contracts with take-or-pay provisions increase the stability of its cash flows and support its distributions.
Currently, the company is paying a quarterly distribution of $0.3275 per share, which at recent share prices is good for a forward yield of 7.3%. Management has said it's looking to grow its distribution by 3% to 5% annually. The distribution is well covered. Its distributable cash flow (operating cash flow minus maintenance capex) was more than twice its distribution last quarter.
An attractive valuation
In addition to Energy Transfer being in a strong financial position with growing opportunities, the stock is also cheap on both a historical and relative basis, trading at a forward enterprise-value-to-EBITDA multiple of just 8. Between 2011 and 2016 (before the pandemic), midstream MLPs traded at an average multiple of 13.7, and the stock currently trades at a lower valuation than most of its peers.
Data by YCharts.
Now, Energy Transfer is not a risk-free investment. The company carries debt, and falling commodity costs and macroeconomic headwinds can take a toll on fossil fuel volumes. However, given its improved contract structure and balance sheet, along with its current growth opportunities, Energy Transfer's stock should provide investors with both an increasing income stream and solid price appreciation potential.
That makes it a magnificent stock to buy and hold for the long run.
