Energy Transfer: Buy, Sell, or Hold

Energy Transfer (NYSE: ET) stock has had a solid run recently. The stock has risen by over 17% this year and has about doubled since the end of 2021.

Given that solid performance, investors may be wondering if the stock is a buy, sell, or hold at this point. Let's take a look at each case.

The buy case for Energy Transfer

There are a number of facets to the bull case for Energy Transfer. The first is the solid growth opportunities in front of the midstream master limited partnership (MLP). The company has one of the most robust expansion backlogs in the space, with it looking to spend $3.1 billion on growth projects this year. With projects set to come online both in 2025 and 2026, the company has solid visibility into growth.

In addition, Energy Transfer has been one of the biggest consolidators in the space in recent years, buying up smaller rivals and integrating them into its expansive system. The company has a solid history of finding assets that are ultimately more valuable as part of its integrated system than they are by themselves.

Given its large integrated system and access to cheap gas out of the Permian, the company is also well positioned to benefit from the increasing energy needs associated with the artificial intelligence (AI) data center buildout. The company has already signed deals to bring more gas to power companies based on increasing AI demand and has even had discussions with data center operators looking to build onsite power generation.

Outside of its growth opportunities, Energy Transfer has done a nice job of improving its balance sheet and learning to grow within its means. Its second-quarter results reported a distribution coverage ratio of over 1.8 times based on its non-consolidated distributable cash flow, which is cash flow before growth capital expenditures (capex), and payout to partners.

At the same time, Energy Transfer continues to trade at a forward enterprise-value-to-EBITDA multiple of 8 times based on 2025 estimates, which is well below historical levels, not to mention one of the lowest valuations in the MLP space. As a reference, the midstream industry as a whole traded at a 13.7 times EV/EBITDA average multiple between 2011 and 2016.

The sell case for Energy Transfer

While Energy Transfer has newfound discipline, that hasn't always been the case. The company had to cut its distribution in half in the fall of 2020 after it had gotten over its skis with its debt and needed to reduce its leverage. It was able to accomplish that pretty quickly, and the distribution is now higher than before the cut, but there is always the risk the company could once again overextend itself.

At the same time, in the past when the master limited partnership's general partner (GP) and limited partner (LP) traded as two entities, Energy Transfer was not known to be particularly shareholder-friendly under then-CEO Kelcy Warren. While merging the GP and LP and removing Warren as CEO helped eliminate the conflicts of interest and align shareholder interests with those of Warren, he is still the company's largest shareholder and still involved as chairman. Warren's continued involvement could be a significant reason why the stock continues to trade at a discount to peers.

At the end of the day, Energy Transfer is still in the energy business. As a transporter of fossil fuels, where domestic volumes are headed in the future matter for the company. The push toward green energy could turn out to be a long-term headwind, although the pace of the green transition seems to be slowing, as evidenced by the big slowdown in sales growth of electric vehicles (EVs) this year as well as the massive buildout of energy-hungry AI data centers.

Image source: Getty Images.

The hold case for Energy Transfer

With a robust forward yield of 7.9%, investors still get a nice return if the stock does much of nothing. In fact, that is pretty much what the stock has done since early May, simply trading in a very tight range. The trading range has been particularly narrow since mid-August.

With an attractive yield and growing distribution, income-oriented investors probably don't mind Energy Transfer's current lack of volatility. That would make it a solid hold for these investors.

The verdict

With its issues now firmly in the past, I'd be a buyer of the stock given its growth opportunities, current financial discipline, and attractive valuation and yield. The stock has had a solid year in 2024, but I think there could be more upside ahead.

If the company can start to show that it's an AI beneficiary, I think it should start to attract more investors. In the meantime, investors can enjoy collecting its robust distribution.

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Geoffrey Seiler has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.