Energy Transfer (ET 1.01%), one of America's leading midstream companies, might not seem like an exciting investment. Yet over the past three years, it's rallied 42%. If we include its reinvested distributions, it delivered a total return of 78%. Let's see why Energy Transfer's stock soared -- and if it will keep providing both growth and income over the next three years.
What does Energy Transfer do?
Energy Transfer operates over 140,000 miles of pipeline across 44 states. It provides delivery, storage, and terminalizing services for natural gas, liquefied natural gas (LNG), natural gas liquids (NGLs), crude oil, and other refined products. It also exports some resources overseas.
Image source: Getty Images.
Like other midstream pipeline companies, Energy Transfer charges upstream extraction companies and downstream refining companies "tolls" to use its pipelines. That business model is well-insulated from volatile commodity prices, since it only needs those resources to continuously flow through its pipes to generate stable profits. However, it isn't immune to tariffs, which can drive up its material, labor, and construction costs. High interest rates can also throttle its growth by making it more expensive to finance its expansion plans.
Energy Transfer structures its business as a tax-efficient master limited partnership (MLP), which blends a return of capital (which isn't taxed at the capital gains rate unless the underlying position is sold) and ordinary income to fund its distributions.
Therefore, a fluctuating percentage of its high forward yield of 7.3% actually comes from its investors' own cash. However, its adjusted distributable cash flow (DCF) -- a key measure of an MLP's ability to cover its distributions -- has stayed comfortably below 100% in recent years.
NYSE: ET
Key Data Points
What are its catalysts and challenges?
Over the past few years, Energy Transfer has added more than 50,000 miles of pipelines through acquisitions of several industry peers.
Over the next few years, it could make even more acquisitions, while the expansion of its core Permian Basin operations and the completion of its Lake Charles LNG project in Louisiana should drive its organic growth. The Trump Administration's friendly policies toward fossil fuels and push for lower interest rates should generate additional tailwinds for the company.
MLPs usually gauge profitability through adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings per public unit (EPU). Analysts expect its adjusted EBITDA and EPU to grow at CAGRs of 6.5% and 11.7%, respectively, from 2025 to 2027.
Where will its stock be in three years?
At $18, Energy Transfer still looks like a bargain at 12 times this year's EPU. Its stock should continue rising over the next three years as it attracts more investors with its evergreen business model, high tax-efficient distributions, and exposure to the booming energy market.
