Energy Transfer (ET +0.43%) is considered by many to be a reliable income investment. It's a midstream company that operates over 135,000 miles of pipeline across 44 states, and it charges upstream and downstream companies to use its infrastructure with its "toll road" business model.
The business operations are well-insulated from volatile commodity prices. As long as its customers keep their crude oil, natural gas, liquefied natural gas (LNG), and other refined products flowing through its pipelines, it can generate stable profits to cover its distributions.
Image source: Getty Images.
As a master limited partnership (MLP), Energy Transfer merges the tax advantages of a private partnership with the liquidity of a publicly traded stock, and it aims to pay out most of its profits -- which are measured as its earnings per public unit (EPU) -- as distributions to its investors. It currently pays a forward annual dividend of $1.31, which translates to a forward yield of 7.2% and can be comfortably covered by its expected EPU of $1.40 for 2025.
Over the past five years, Energy Transfer's stock rallied 155% and delivered a total return of 293% after including its reinvested distributions. The S&P 500 only generated a total return of 116% during the same period. Let's see why Energy Transfer beat the market by such a wide margin -- and if it can maintain its momentum over the next five years.
NYSE: ET
Key Data Points
What happened to Energy Transfer over the past few years?
Over the past five years, Energy Transfer expanded its pipeline network by more than 45,000 miles. That growth was driven by its organic expansion as well as its acquisitions of Enable Midstream Partners, Lotus Midstream, Crestwood Energy Partners, and WTG Midstream.
From 2019 to 2024, it grew its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at a CAGR of 7%. Its EPU, which includes the depreciation costs for its pipelines and the integration expenses of its acquisitions, grew at a lumpier rate. Its annualized distributions per unit (DPU) also fluctuated with its EPU:
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|---|---|---|---|---|---|---|
|
Adjusted EBITDA |
$11.2 billion |
$10.5 billion |
$13.1 billion |
$13.1 billion |
$13.7 billion |
$15.5 billion |
|
EPU |
$1.36 |
($0.24) |
$1.89 |
$1.40 |
$1.09 |
$1.28 |
|
Annualized DPU |
$1.22 |
$1.07 |
$0.61 |
$0.98 |
$1.22 |
$1.30 |
Data source: Energy Transfer.
However, MLPs usually cover their distributions with their distributable cash flow (DCF) -- which excludes the messy depreciation costs of its pipelines as well as the near-term noise from its acquisitions -- instead of rigidly pinning their DPU to their EPU. By that measure, its annualized DCF still easily covered its total distributions over the past six years:
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|---|---|---|---|---|---|---|
|
Annualized DCF* |
$6.3 billion |
$5.7 billion |
$8.2 billion |
$7.5 billion |
$7.6 billion |
$8.4 billion |
|
Total distributions |
$3.2 billion |
$2.5 billion |
$1.8 billion |
$3.1 billion |
$4 billion |
$4.4 billion |
Data source: Energy Transfer. *Adjusted basis.
Back in 2020, Energy Transfer's EPU and DCF declined as the pandemic forced many of its upstream and downstream customers to temporarily suspend their operations. But it recovered as those headwinds dissipated, and it aggressively expanded out of that downturn by gobbling up its aforementioned peers.
What will happen to Energy Transfer over the next few years?
Over the next five years, the secular growth of the LNG export market, the potential completion of its Lake Charles LNG project in Louisiana (which is awaiting a final investment decision), the tighter integration of its Crestwood and WTG acquisitions, and its ongoing expansion in the Permian Basin should drive its adjusted EBITDA and DCF growth. The Trump administration's focus on boosting domestic energy production and relaxing regulations on pipeline operators could generate additional tailwinds for the industry, but higher tariffs on steel and other raw materials could also drive up its construction costs.
From 2024 to 2027, analysts expect Energy Transfer's adjusted EBITDA to grow at CAGR as the macro environment stabilizes. Assuming it matches those estimates, continues to grow its adjusted EBITDA at a CAGR of 5% from 2027 to 2031, and still trades at 7.5 times its forward adjusted EBITDA, its enterprise value could grow about 11% to $141 billion by 2030. Therefore, Energy Transfer might not consistently beat the S&P 500 -- which has generated an average annual return of 10% since its inception -- on its own over the next five years. But if it continues to grow its profits and raise its distributions, it could still deliver a higher total return than the S&P 500.
