Midstream Mastermind: Why Energy Transfer Remains a Compelling Investment Opportunity
Despite its impressive 20% rally this year, Energy Transfer (NYSE: ET) still offers a lucrative combination of income and growth potential, making it an attractive investment opportunity for those seeking a passive income stream. The master limited partnership’s (MLP) total return has outperformed the S&P 500’s, driven by its high-yielding distribution and robust earnings growth.
Energy Transfer’s financial performance has been exceptional, with adjusted EBITDA surging 20% to nearly $3.8 billion in the second quarter, accompanied by a 32% increase in distributable cash flow to over $2 billion. The company’s strategic acquisitions, including Lotus Midstream and Crestwood Equity Partners, have fueled record volumes across several categories. Additionally, strong market conditions and recently completed organic expansion projects have contributed to its growth.
The MLP’s growing cash flow has enabled it to increase its distribution by over 3% in the past year, while its financial profile has strengthened, with a leverage ratio now in the lower half of its target range. This has positioned Energy Transfer for continued expansion, including its recent acquisition of WTG Midstream and a joint venture with Sunoco LP to combine their crude oil and produced water assets in the Permian Basin.
Despite its surging unit price, Energy Transfer still trades at a discounted valuation compared to its midstream sector peers. Its forward enterprise value (EV) to EBITDA multiple is less than 8.0 times, significantly lower than its peer group average. This undervaluation has resulted in a high distribution yield of nearly 8%.
Energy Transfer’s growth profile has been enhanced by its acquisition of WTG Midstream and additional expansion projects, with capital spending expected to reach $3 billion to $3.2 billion this year. The company’s capital project backlog provides growth visibility through 2026, and it has several additional expansion projects under development, including lower carbon energy opportunities.
With its high-yielding payout and growth potential, Energy Transfer offers investors a compelling opportunity for total returns above 10% annually. While its unit price has rallied this year, its low valuation, high yield, and growth profile make it an attractive investment opportunity, despite the potential tax filing complexities associated with its Schedule K-1 Federal Tax Form.
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