Key Points
Energy Transfer lowered its full-year guidance slightly.
The company continues to add exciting new growth projects to its backlog.
The stock is cheap both compared to peers and historically.
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Energy Transfer (NYSE: ET) is a favorite among income-oriented investors. The master limited partnership (MLP) sports a 7.4% yield and has been growing its distribution nicely in the past few years. While MLPs come with some extra paperwork at tax time, the majority of their distributions are deemed a return of capital and are tax-deferred until the stock is sold.
What’s even more exciting, though, is that the midstream company is entering a new growth phase, and its backlog of attractive projects is starting to pile up. This should lead to solid growth in the coming years.
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The company recently announced a new large growth project right around the time it posted its second-quarter results.
Growth projects keep piling up
Just ahead of its earnings announcement, Energy Transfer announced a new $5.3 billion natural gas pipeline project called the Desert Southwest pipeline that will take natural gas from the Permian to markets in Arizona and New Mexico. The pipeline will be able to handle 1.5 billion cubic feet per day (Bcf/d), and it expands the company’s Transwestern natural gas pipeline network. The project is expected to be complete by the end of 2029 and is backed by significant long-term commitments.
This follows the company’s already announced Phase 1 of its Hugh Brinson Pipeline, which also will have 1.5 Bfc/d of capacity takeaway from the Permian to markets in Texas. Phase 1 of the project is expected to come online by the end of 2026. Energy Transfer also just agreed to go through with Phase 2 of the project, which will give it the ability to transport approximately 2.2 Bcf per day of natural gas from west to east and approximately 1 Bcf per day from east to west. The company said that the project “establishes Energy Transfer as the premier option for customers seeking a flexible and reliable natural gas solution to support their power plant and data center growth plans.”
Energy Transfer also said it is making substantial progress toward the commercialization of its Lake Charles LNG project. LNG (liquified natural gas) exports are one of the hottest areas of the energy market. The long-awaited project looks like it may finally get the green light, with it finding a partner for the project in MidOcean Energy and signing a number of offtake agreements. The company is also in advanced discussions with some offtake partners for them to take an ownership stake, and it ultimately plans to own about 25% of the project.
The company also remains excited about the opportunities it sees coming from data center customers. It said it continues to see a significant level of activity and that it is in advanced discussions with several facilities in close proximity to its footprint.
Overall, the company is spending $5 billion in growth capital expenditures (capex) this year, and it has a lot more projects lined up. Half its current growth spending will be on natural gas-focused projects.
Turning to its Q2 results, Energy Transfer grew its adjusted EBITDA in the quarter by 3% year over year to $3.87 billion. Distributable cash flow (DCF) to partners fell 1% to $1.96 billion, down from $2.04 billion a year ago.
Volumes were up across its systems, including an 11% year-over-year jump in interstate natural gas volumes, a 10% jump in midstream gathered volumes, a 9% rise in crude oil volumes, and an 8% increase in intrastate natural gas volumes. However, the company saw some reduced pipeline optimization in its Texas intrastate pipeline system due to lower spreads, and it saw lower crude transportation revenues on its Bakken pipeline system.
As a result, the company now expects its full-year EBITDA to be at or slightly below the low end of its $16.1 billion to $16.5 billion guidance.
Image source: Getty Images.
Time to buy Energy Transfer stock
While the slight reduction in guidance is disappointing, the long-term story for Energy Transfer looks bright. The number of growth projects the company has in front of it is just piling up, with it generally expecting to get a mid-teens return on these projects. The larger projects are still a ways off, but they should provide the company with a strong runway of growth in the coming years.
At the same time, investors get a nice distribution that is well covered by the company’s DCF. For Q2, its coverage ratio was a robust 1.7 times. The company is looking to grow its distribution by a 3% to 5% annual rate moving forward, and it increased its quarterly payout by more than 3% year over year last month to $0.33 per unit.
Meanwhile, about 90% of its 2025 EBITDA is coming from fee-based operations, with many of its contracts having take-or-pay provisions, so this is a nice steady business. The company’s balance sheet is also in good shape.
Turning to valuation, the stock trades at a forward enterprise value (EV)-to-EBITDA multiple of just 8.1 times. That’s toward the low end of its MLP peers and below the 13.7x EV/EBITDA multiple the average MLP traded at between 2011 and 2016.
With a lot of growth ahead, a robust yield, growing distribution, and cheap valuation, Energy Transfer looks like a great option for income-oriented investors moving forward.
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Geoffrey Seiler has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
