5 Reasons to Buy Energy Transfer Stock Like There’s No Tomorrow

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The term “Energy Transfer” (ET) might not sound exciting, but it boasts an exceptional balance between risk and reward in today’s market, along with a substantial return. It is among the top investments in my portfolio.

Here are five compelling reasons to consider purchasing shares of the midstream energy company right away, although remember that investing in a master limited partnership will require you to receive a Schedule K-1 tax form, which may necessitate additional steps during your tax filing process.

1. A rock-solid financial position

Over the course of the past few years, Energy Transfer has been focusing on streamlining its finances after taking on too many commitments during its previous expansion phase. This involved reducing its distributions in 2020 to lower debt exposure, as well as paying off existing debts and primarily financing future growth through its own cash reserves.

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Currently, the leverage level sits at the lower end of the pipeline company’s specified range. In their latest conversation with analysts, management expressed that their balance sheet is stronger than ever before. This strength allows them to invest in expansion projects and distribute capital back to shareholders, all while avoiding the risk of overextension again due to financial constraints.

2. Predictable cash flow

Approximately 90% of Energy Transfer’s earnings, excluding interest, taxes, depreciation, and amortization (EBITDA), comes from fee-based services that are not influenced by commodity prices. Additionally, a large portion of their contracts are “take-or-pay,” meaning customers must pay for the service whether they use it or not. This consistent revenue generates a reliable cash flow, which is essential for supporting its distribution and growth initiatives.

In the last quarter, Energy Transfer announced that it holds a significant number of contracts with a take-or-pay clause. This situation provides the company with unprecedented clarity and insight.

3. A high yield with a safe and growing distribution

Currently, the company’s shares provide a projected dividend yield of 7.5%, and I should note that the stock is comfortably supported by its earnings. The business is producing approximately double the cash required for its distributions. In the last quarter alone, the distributable cash flow coverage ratio stood at 2.1, offering ample flexibility for management to further boost this figure.

For the past 13 quarters in a row, its distribution has been increased, surpassing its levels prior to 2020 when reductions were necessary. Due to its coverage ratio, robust financial structure, and take-or-pay contracts, Energy Transfer is poised for expansion in its distribution over the coming years. The management intends to boost it by 3% to 5% every year.

For 13 quarters straight, Energy Transfer has been increasing its payout, surpassing pre-2020 levels when reductions were made. Its good financial health and contracts ensure it can continue growing this payout in the future. The management plans to raise it by 3% to 5% annually.

4. Increasing natural gas demand is a catalyst

Apart from fortifying its financial standing and refining its contract arrangements, the company is now focusing on expansion. This year, it intends to invest $5 billion, an increase from the $3 billion spent last year. Furthermore, the company aims for mid-range returns, around 15%, on its upcoming projects. These projects aren’t merely theoretical; they are backed by genuine demand and secured with long-term contracts.

Among its notable ventures, one significant undertaking involves the Hugh Brinson pipeline system, constructed for transporting natural gas from the Permian Basin in West Texas, fulfilling the increasing energy requirements across other regions within the state.

Energy Transfer has made significant strides on its long-awaited Liquefied Natural Gas (LNG) project at Lake Charles and has entered into a cost-sharing agreement with MidOcean Energy and other parties. Assuming the project moves forward, it will create a new expansion opportunity linked to LNG exports. The projected demand for LNG is set to soar by 60% by the year 2040.

Concurrently, artificially intelligent (AI) data facilities are evolving into a possible additional need for energy. The company has entered into an agreement with CloudBurst for the provision of gas to construct a new AI-centric data center they intend to establish in Texas.

Management is currently engaged in negotiations with over 60 power plants and more than 200 data centers spread across 14 different states. These potential ventures involve minimal investment and promise swift profits.

5. The stock looks too cheap

Despite all things working in its favor, Energy Transfer’s stock value is relatively low compared to its future earnings, with a forward enterprise-value-to-EBITDA ratio of only 8. This is significantly less than its typical historical ratio and cheaper than most similar companies. From 2011 to 2016, the average multiple for midstream master limited partnerships (MLPs) was approximately 13.7.

Investors are yet to fully grasp the significant strength of Energy Transfer’s current business. The company has streamlined its financial structure, enhanced its contracts, and is strategically expanding while ensuring strong returns. Its combination of growth potential and appealing dividend makes it an attractive choice for investors prioritizing income.

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2025-07-20 19:51