Energy Transfer Is Cashing In on a Powerful New Growth Opportunity

Energy Transfer (NYSE: ET) is known for the income it generates for investors. The master limited partnership (MLP) currently pays a 6.7%-yielding cash distribution.

However, investors shouldn't discount its growth prospects. It delivered double-digit earnings and cash-flow growth last year, fueled by a combination of acquisitions, organic expansion projects, and strong market conditions. The MLP sees a lot more growth coming down the pipeline, driven partly by an expected surge in power demand over the coming years. It has already started to cash in on this opportunity, which should continue.

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A powerful growth opportunity

Co-CEO Tom Long discussed the powerful growth Energy Transfer sees ahead for U.S. electricity demand on the company's fourth-quarter conference call. He noted: "The broader consensus, combined with the number of inbounds we're receiving, suggests that natural gas fuel power demand will increase significantly in the future. We believe the growth needed to accommodate this demand will be significant, and we are in a unique position to capitalize on this opportunity set."

Energy market forecasters expect the U.S. to experience an unprecedented surge in power demand in the coming years. For example, a forecast by IHS sees U.S. power demand growing a staggering 55% over the next 20 years. That's about six times faster than it grew during the prior 20-year period (around 9%). Several factors are driving this resurgence, including the onshoring of manufacturing, the electrification of everything, and AI data centers.

Surging power consumption will drive demand for all types of power sources, including natural-gas-fired plants. Fellow co-CEO Marshal McCrea noted on the call that future gas demand could be substantial. He stated:

We're extremely well positioned to capture whatever the growth is, but we've certainly seen numbers north of 10 or 12 Bcf/d [billion cubic feet per day]. But we don't know where it's going to go. We just know it's going to be big, and we're going to play a big role in that growth.

To put that into context, total U.S. natural gas demand was around 110 Bcf/d last year.

Cashing in on surging gas demand

"Given Energy Transfer's extensive natural gas infrastructure," stated Long on the call, "we continue to believe that we are the best positioned to capitalize on the anticipated rise in natural gas demand." The company operates over 105,000 miles of natural gas gathering, interstate, and intrastate pipelines that move more than 55 Bcf/d. It also has 236 Bcf of natural gas storage capacity.

The company's in-place infrastructure gives it a strategic advantage to capitalize on growing gas demand. It has already received a massive number of inbound calls from companies seeking future gas supplies to meet their needs. Long reported on the call: "In aggregate, we have now received requests for potential connections to approximately 62 power plants that we do not currently serve in 13 states and up to 15 plants that we already serve today. In addition, we have now received requests from over 70 prospective data centers in 12 states."

The company won't win all those opportunities. However, McCrea stated: "We believe over the next 18 to 24 months that we'll capture between 3 and 4 Bcf. That may sound aggressive, but we're chasing right now about 150 power plants, about half of which are either new power plants and/or coal-fired retirements that are going into it, and then about half of those or maybe a little more are data centers."

The company has already started to cash in on surging demand from data centers. Long highlighted on the call: "We have entered into a long-term agreement with CloudBurst data centers to provide natural gas to their flagship AI-focused data center development in Central Texas." He noted that the company would use its existing Oasis Pipeline to provide natural gas supply to CloudBurst's next-generation data center campus outside of San Marcos, Texas.

The company believes the contract will be the first of many commercial agreements to supply gas directly to a data center site. It also expects to sign deals to transport gas to new power plants. Meanwhile, increasing gas demand from end users will drive additional opportunities to expand its extensive gas infrastructure. It will likely need to build more gathering pipelines, construct additional processing capacity, and expand its intrastate and interstate pipelines.

Lots of fuel to grow

Energy Transfer expects to invest $5 billion into growth projects this year (a $2 billion increase from last year), which should fuel another growth spurt in 2026. Given the expected surge in gas demand, it could grow at an accelerated rate for many years to come. Add that growth to its attractive income stream, and Energy Transfer could have the fuel to produce powerful total returns for its investors in the future.

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