Could Buying Energy Transfer Stock Today Set You Up for Life?

Globe and Mail

a day ago

Key Points
Energy Transfer has extensive natural gas, natural gas liquids (NGLs), and crude oil operations.
The limited partnership's juicy distributions should continue to grow over time.
Energy Transfer also has tremendous growth opportunities supplying natural gas for AI-focused data centers.
10 stocks we like better than Energy Transfer ›
Investing in hot technologies can be done in different ways. For example, when personal computers were first catching on, some investors bought software stocks rather than the stocks of PC makers. In the early days of the internet boom, some invested in networking stocks instead of highly volatile dot-com start-ups.
A similar opportunity is available today with artificial intelligence (AI). You could bet on which AI stock you hope will be the biggest winner. However, some investors understand that AI models require massive amounts of power. And they know that the largest source of generating electricity in the U.S. is natural gas. The stocks of companies that transport and process natural gas should, therefore, be big winners as demand for AI surges.
Enter Energy Transfer LP (NYSE: ET), one of the best natural gas stocks on the market. Could buying Energy Transfer stock today set you up for life?
About Energy Transfer
The first thing you should know about Energy Transfer is that it's a limited partnership (LP). One key benefit of investing in an LP is that it doesn't pay corporate income taxes. This can help investors avoid double taxation, where the company pays taxes on its profits and then pays dividends to unitholders who have to pay taxes on the dividends.
If you want to profit from increased natural gas demand driven by AI, Energy Transfer is one of the top midstream companies in North America. Its natural gas pipelines generate roughly 19% of its total adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Operations related to natural gas liquids (NGLs) and refined products contribute 20% of adjusted EBITDA. Midstream assets, including natural gas gathering pipelines, kick in another 20%.
Energy Transfer's pipelines transport around 32.4 million British thermal units (BTUs) of natural gas each day. The LP fractionates (separating NGLs into their components) in the ballpark of 1.15 million barrels per day of NGLs. And its facilities can store roughly 236 billion cubic feet of natural gas.
However, Energy Transfer's business isn't limited to natural gas and NGLs. The company also transports around 7 million barrels per day of crude oil. Its Sunoco subsidiary primarily focuses on energy infrastructure and the distribution of motor fuels. Its USAC subsidiary provides compression services used in processing and transporting crude oil, in addition to natural gas.
A pipeline to attractive total returns
Energy Transfer has delivered a cumulative total return of around 300% over the last five years. The LP's distributions accounted for nearly half of that amount.
Distributions should continue to play an important role in total returns for a long time to come. Energy Transfer's distribution yield (the LP version of dividend yield) currently stands at 7.59%. The company targets annual distribution growth of between 3% and 5%.
Investors will likely enjoy more than just juicy distributions, though. Energy Transfer's unit price should also appreciate nicely as its adjusted EBITDA rises. Between 2020 and 2024, the midstream leader's adjusted EBITDA increased by a compound annual growth rate of 10%. Is that level of growth sustainable? Probably so.
Energy Transfer has a significant project backlog that it believes will support long-term growth. In its second-quarter update, the company reported requests to connect to around 200 data centers in 15 states. It also had requests to connect to more than 60 power plants in 14 states.
Perhaps the biggest indicator of how AI could boost Energy Transfer's fortunes over the long run is its agreement with CloudBurst to provide natural gas to data centers in central Texas. With this deal, Energy Transfer's pipelines will provide up to 450,000 million BTUs per day of natural gas to CloudBurst's AI-focused data center campus.
Setting you up for life?
With all this in mind, can investing in Energy Transfer set you up for life? Maybe. The answer to the question hinges largely on how much money is required to achieve the goal, which will vary from one person to the next. It also depends on how much money you can invest and what your investment time frame is.
Whether or not buying Energy Transfer stock sets you up for life, it could be a profitable long-term investment. Income investors should especially find this LP attractive because of its ultrahigh distribution yield.
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