Energy Transfer Stock: Buy, Sell, or Hold?

Energy Transfer (NYSE: ET) has had a strong 2024, with its stock price up about 40% as of this writing. At the same time, the master limited partnership (MLP) pays an attractive distribution that is good for a forward yield of 6.7%.

With the stock having more than tripled in value since the end of 2020, the question becomes, is it a buy, sell, or hold going forward? Let's look at the buy and sell cases to decide.

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The buy case for Energy Transfer

Energy Transfer has created one of the largest integrated midstream systems in the U.S. It handles the transport, storage, and processing of various energy products, including natural gas, liquid natural gas (LNG), crude oil, and refined oil products. This system allows the company to take advantage of both increasing volumes for these products as well as any geographic, time, or product arbitrage opportunities that come about. For example, natural gas can trade at higher prices in different regions of the U.S. as well as during different seasons, such as the winter. As such, Energy Transfer can profit by storing natural gas for winter needs or by transporting it to higher-priced regions. It is also able to upgrade certain hydrocarbons to other products that can be more valuable.

This type of integrated system is highly valuable and helps open up opportunities for the company in the areas of LNG exports and increasing natural gas demand stemming from the increased energy needs created by the artificial intelligence (AI) buildout. The company's strong positions in Texas and the Permian Basin give it access to a lot of cheap associated natural gas, which makes it a prime candidate to benefit from these trends.

The company already has one of the most robust growth projects in the midstream space, and currently is looking to spend between $2.5 billion and $3.5 billion annually in growth capital expenditure (capex) given the opportunities it is seeing. On its last earnings call, the company also noted that it was seeing strong inbound interest from both power generation companies and data center operators about natural gas pipeline projects related to the increasing power consumption needs coming from the AI infrastructure buildout.

Earlier this month, meanwhile, the company announced a new natural gas pipeline project that will help support power plant and data center growth in Texas by transporting natural gas out of the Permian. The $2.7 billion project is backed by a long-term, fee-based contract and is scheduled to be in service by the end of 2026.

Despite Energy Transfer's strong position to benefit from the increasing power needs associated with AI, it is one of the cheapest MLP midstream stocks, trading at a forward enterprise value (EV)-to-EBITDA ratio of 8.8 times this year's analyst estimates. The EV-to-EBITDA ratio is one of the most common ways to value pipeline stocks given their debt and growth capex.

Data by YCharts.

MLPs as a whole, meanwhile, are trading well below the 13.7 multiple they traded at between 2011 and 2016. In addition, Energy Transfer currently forecasts that it will raise its already attractive distribution by between 3% and 5% a year moving forward.

The sell case for Energy Transfer

Energy Transfer has not always been the most conservative MLP. The company got a bit over its skis back in 2020 and had to cut its distribution nearly in half as it needed to shore up its balance sheet due to a weakening energy market. Notably, though, the company was able to quickly lower its leverage and was able to return its distribution to its previous level in early 2023. Today, its quarterly distribution is nearly 6% higher than it was before the cut.

Energy Transfer has also not always been the most shareholder-friendly company. Its former CEO and largest shareholder Kelcy Warren has long been accused of being more concerned about building an empire than his company's stock price. He was also accused of self-dealing after trying to get preferential treatment on Energy Transfer distributions through a preferred convertible stock deal when the company was trying to merge with Williams Companies back in 2016. That attempt was thwarted and the merger never went through. The company also had a reputation of favoring its publicly traded general partner, which was heavily owned by Warren, at the expense of LP holders, which were largely retail investors.

However, Warren is no longer CEO and the company long ago removed the conflicts of interest it was dealing with when its general partnership (GP) and limited partnership (LP) ownership entities merged back in 2018. Warren, who remains chairman, now owns the same shares (or units as MLPs call them) as regular investors.

Like all companies in the energy patch, Energy Transfer is exposed to the shifts in the energy market and the long-term march toward renewables. However, it is much more of a volume-based company with a large percentage of its business operating on fee-based contracts. Its integrated system also tends to have a lot of natural hedges, where if one area is struggling another area may then be prospering. The increasing power needs of AI, meanwhile, is a big opportunity.

Image source: Getty Images.

The verdict on Energy Transfer

With its transgressions now long behind it and owning one of the best set of assets in the midstream space, Energy Transfer's stock is attractively priced both compared to peers and from a historical perspective. Meanwhile, it looks well positioned to be one of the midstream companies to most benefit from the AI power opportunity given its strong Texas footprint and access to cheap Permian natural gas. As such, I view the stock as a buy heading into 2025.

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Geoffrey Seiler has positions in Energy Transfer, Enterprise Products Partners, and Western Midstream Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.