Over the past few months, as tensions in the Middle East have escalated, oil and gas prices experienced roller-coaster price action. With this, investors have tried to find a way to capitalize on the trend while avoiding the high risk and volatility of traditional oil stocks.
In my view, the best move isn't to find the "least risky" oil exploration stock or the "least risky" refining and marketing stock, but to find a stock that benefits from spot oil prices but whose bull case doesn't hinge entirely on them.
Believe it or not, such a name exists: Energy Transfer LP (ET 0.57%).
Image source: Getty Images.
Energy Transfer LP at a glance
Based in Dallas, Texas, Energy Transfer LP is a master limited partnership (MLP) that owns or controls over 140,000 miles of oil and gas pipelines, also known as midstream energy assets. One key strength of the midstream energy space compared to upstream (energy production and exploration) and downstream (refining and marketing) is the relatively stable nature of its toll-road-style business model.
Instead of midstream energy transport prices fluctuating based on spot prices, pipeline owners collect fees that are 90% fixed and 10% variable. This makes entities like Energy Transfer steadily profitable cash cows throughout all stages of the oil price cycle.
NYSE: ET
Key Data Points
Energy Transfer is a top stock to buy and hold in all markets
With these steady cash flows come high yields for unit holders. Similar to REITs, MLPs are required to pay out 90% of their pre-tax income. As a result, this particular MLP has annual distributions that give it an effective forward yield of around 7%.
Often, the flip side of midstream energy MLPs is that they pay distributions but experience little price appreciation. However, this could differ with Energy Transfer. Capitalizing on growth opportunities, such as the proliferation of artificial intelligence (AI) data centers across the United States, this MLP anticipates distribution growth in the 3%-5% range over the next few years. This may result in price appreciation, which, along with distributions, could produce total returns well above expectations for investors.
