3 Reasons I'm Excited About Energy Transfer Stock in 2025

Globe and Mail

5 days ago

Key Points
Energy Transfer pays a lucrative distribution backed by a strong financial profile.
The MLP has visible growth coming down the pipeline.
It trades at a low valuation compared with its peer group.
10 stocks we like better than Energy Transfer ›
Energy Transfer (NYSE: ET) is one of my largest income investments. I'm pleased to have a higher allocation to the master limited partnership (MLP) because of all it offers investors like me. Here are three reasons I'm excited to hold the midstream giant this year.
A lucrative and growing income stream
My main reason for owning Energy Transfer is its lucrative distribution. With my low cost basis, I earn a yield of more than 10% on this MLP, compared with its current yield of more than 7%.
That high-yielding payout is on a very sustainable foundation. The MLP produces very stable cash flow as long-term, fee-based contracts and government-regulated rate structures provide about 90% of its annual earnings. Meanwhile, it distributes a conservative portion of its cash flow to investors. The midstream giant generated $2.3 billion of distributable cash flow during the first quarter, easily covering the $1.1 billion of cash it distributed to investors.
That excess free cash flow allows Energy Transfer to invest in its expansion while maintaining a strong financial profile. Its leverage ratio is in the lower half of its 4.0-to-4.5 target range, putting the company in the strongest financial position in its history.
This strong financial position also allows it to raise its distribution. Energy Transfer aims to increase its payment every quarter, targeting 3% to 5% annual growth. It has raised its distribution by more than 3% in the past year.
A growth acceleration ahead
Energy Transfer has ample fuel to continue increasing its high-yield payout. The MLP plans to invest $5 billion in organic expansion projects this year, including the construction of gas processing plants, a new large-scale gas pipeline, and additional export capacity. These projects should add to its cash flow as they launch over the next two years, accelerating earnings growth beyond the 5% expected this year.
The MLP also has more expansions planned. For example, it's developing a large LNG export terminal and a pipeline for an AI data center. Catalysts such as growing Permian output, U.S. gas demand, and the growing global need for U.S. natural gas liquids should help fuel its continued expansion.
Energy Transfer also boosts its growth rate with strategic acquisitions. While it hasn't announced a deal this year, its affiliate, Sunoco LP, is buying Parkland in a $9.1 billion deal, which will provide Energy Transfer with incremental income. Meanwhile, the company's strong financial profile gives it the flexibility to continue its strategy of consolidating the midstream sector.
A low valuation
Financially strong companies with visible earnings growth usually trade at a premium valuation. However, that's not the case with Energy Transfer. The MLP currently trades at about 9 times its enterprise value (EV) to EBITDA (earnings before interest, taxes, depreciation, and amortization). That's the second lowest valuation multiple in its peer group and well below the average of around 12 times EV/EBITDA.
The MLP's low valuation drives its high distribution yield. It also provides investors with the potential for a higher return through valuation expansion.
Income, growth, and value-driven upside potential
There are many reasons to be excited about Energy Transfer. The MLP pays a strong, growing distribution supported by its best-ever financial profile. It also has visible growth ahead. To top it off, it trades at a bargain price. These factors could fuel strong total returns in 2025 and beyond, driving my excitement to continue holding the MLP.
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