Market News
Energy Transfer LP ($ET) remains a popular choice among income-focused investors, boasting a notable yield of 7.4%. With a track record of growing its distributions over recent years, the master limited partnership (MLP) continues to attract attention. Although MLPs come with additional paperwork during tax season, most distributions are classified as a return of capital and are tax-deferred until the stock is sold.
New Growth Projects on the Horizon
Energy Transfer is entering a promising growth phase, with an increasing backlog of exciting projects. Just ahead of its second-quarter earnings announcement, the company unveiled a significant $5.3 billion natural gas pipeline initiative called the Desert Southwest pipeline. This pipeline will transport natural gas from the Permian Basin to markets in Arizona and New Mexico, with a capacity of 1.5 billion cubic feet per day (Bcf/d). The project is slated for completion by the end of 2029 and is supported by substantial long-term commitments.
This announcement follows the earlier Phase 1 of the Hugh Brinson Pipeline, which also has a capacity of 1.5 Bcf/d. Expected to come online by the end of 2026, Phase 2 of this project will enable the transport of approximately 2.2 Bcf per day of natural gas from west to east, and about 1 Bcf per day from east to west. The company highlighted that this development positions Energy Transfer as a leading option for clients seeking versatile and dependable natural gas solutions to support their power plants and data center expansions.
Additionally, Energy Transfer is making strides towards commercializing its Lake Charles LNG project, which focuses on liquefied natural gas exports—a rapidly growing segment in the energy market. Recently, the project secured a partner, MidOcean Energy, and has entered multiple offtake agreements. The company is also in advanced talks with several potential partners to acquire ownership stakes, aiming for a 25% ownership in the project.
Q2 Results and Future Expectations
In its second-quarter report, Energy Transfer reported a 3% year-over-year increase in adjusted EBITDA, reaching $3.87 billion. However, distributable cash flow (DCF) to partners saw a slight decline of 1%, totaling $1.96 billion compared to $2.04 billion a year earlier. The company experienced increased volumes across its systems, with notable year-over-year growth in interstate natural gas volumes (11%), midstream gathered volumes (10%), crude oil volumes (9%), and intrastate natural gas volumes (8%). Despite these gains, lower pipeline optimization in Texas due to reduced spreads and decreased crude transportation revenues on the Bakken pipeline impacted the overall results.
Consequently, Energy Transfer has adjusted its full-year EBITDA guidance to be at or slightly below the lower end of its initial range of $16.1 billion to $16.5 billion.
Valuation and Investor Considerations
Despite a slight reduction in guidance, the long-term outlook for Energy Transfer appears robust. The growing pipeline of projects is expected to yield mid-teens returns, setting the stage for continued growth. Investors can also benefit from a solid distribution that is well-supported by the company’s DCF, which had a coverage ratio of 1.7 times in Q2. The company plans to increase its distribution at an annual rate of 3% to 5% moving forward, with a recent quarterly payout of $0.33 per unit, marking an over 3% increase year-over-year.
Notably, around 90% of Energy Transfer's 2025 EBITDA is expected to derive from fee-based operations, with many contracts featuring take-or-pay provisions, ensuring a steady revenue stream. The balance sheet remains strong, further supporting future growth.
Currently, the stock trades at a forward enterprise value (EV) to EBITDA multiple of just 8.1 times, which is lower than its MLP peers and below the historical average of 13.7x EV/EBITDA from 2011 to 2016. With significant growth prospects, a healthy yield, increasing distributions, and attractive valuations, Energy Transfer presents an appealing option for income-driven investors.
If you're considering where to invest $1,000, take a look at the potential in Energy Transfer. However, be mindful that the Motley Fool's Stock Advisor recently highlighted ten other stocks that may offer substantial returns—Energy Transfer was not included in that list. For more insights on top investment opportunities, visit Inside Ticker.