While much of the market is fixated on tech stocks with ties to artificial intelligence (AI), the technology sector is not the only way to play the AI boom. AI requires a lot of power, and one pipeline company is starting to win significant projects to supply AI data centers with natural gas. That company is Energy Transfer (ET 0.78%), which, in my view, is one of the most attractive stocks to own in the energy space today.
Let's look at what makes Energy Transfer a buy right now.
NYSE: ET
Key Data Points
An increasing backlog of growth projects
Without a doubt, Energy Transfer is one of the best-positioned midstream companies when it comes to capturing growth projects related to the AI infrastructure buildout. The company has one of the largest integrated midstream systems in the U.S., with a strong position in the Permian, which is one of the cheapest sources of natural gas in North America.
On its third-quarter earnings call, it revealed that it has signed a deal with Oracle to supply natural gas to three of the data centers it is building in the U.S., two of which are in Texas. It also has a 10-year deal with Fermi to supply about 300 million cubic feet per day (Mcf/d) of natural gas to its huge data center campus that is currently under construction. It added that it is currently in discussions for multiple data center and power plant deals outside of Texas and Louisiana that are likely to be completed in the future.
In addition, the company currently has a couple of large Permian natural gas takeaway projects in the works that also play into this theme. One is the Hugh Brinson Pipeline, which will have a capacity of 1.5 billion cubic feet per day (Bfc/d) takeaway from the Permian, to markets in Texas to serve the state's expanding energy needs coming from utility and data center customers. The company said this pipeline could become the most valuable asset it has ever built. In addition, its $5.3 billion Desert Southwest pipeline project will take natural gas the other direction into the Arizona and New Mexico markets.
Overall, Energy Transfer plans to spend $4.6 billion in growth capital expenditures (capex) this year and around $5 billion next year, largely around natural gas projects. It expects to generate a mid-teens return on these projects, which should translate into about an incremental $1.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) once they are up and running.
Image source: Getty Images.
Attractive yield and valuation
In addition to its growing project backlog, Energy Transfer also has a robust yield, and the stock is attractively valued.
The master limited partnership (MLP) is currently paying a quarterly distribution of $0.3325 a unit, which is good for a forward yield of 7.9%. That's a more than 3% increase from what it paid out a year ago, and the company plans to continue to raise its distribution at a 3% to 5% yearly clip moving forward. Note that distributions are like dividends, but because Energy Transfer is a partnership, much of it is deemed as a return of capital. This adds some more paperwork at tax time, but this portion of the distributions is then tax-deferred until you sell the stock, which is an added bonus.
Energy Transfer's distribution is currently well covered, with a coverage ratio of 1.7 times based on its distributable cash flow, which is operating cash flow minus maintenance capex. Its balance sheet is also in solid shape, and the company recently noted that it has the highest percentage of take-or-pay contracts in its history, increasing its cash flow visibility.
Best of all, the stock is cheap on both a historical basis and compared to peers. It trades at a forward enterprise value (EV) -to-EBITDA multiple of just 7.7 times 2026 analyst estimates for $17.1 billion in adjusted EBITDA. Between 2011 and 2016, pipeline MLPs traded at an average EV/EBITDA multiple of 13.7 times, with weaker balance sheets and slimmer coverage ratios, so this is a pretty big discount.
Given its growth opportunities, tidied-up balance sheet, robust yield, and attractive valuation, I'd be a buyer of Energy Transfer at current levels.
