Energy Transfer stock (ET) has rallied by roughly 42% over the past year. Despite this impressive rally, the pipeline-focused energy infrastructure giant remains a compelling high-yield opportunity among Master Limited Partnerships (MLPs). The company’s extensive network, including over 130,000 miles of pipelines and export terminals servicing over 80 countries, translates to predictable cash flow. Also, organic growth projects and bolt-on acquisitions have supported growing Distributable Cash Flows (DCF), even as oil and gas prices face pressure. Thus, due to its solid growth prospects, well-covered 7.1% yield, and attractive valuation, I am bullish on ET stock.
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Growing Distributable Cash Flows Despite Pressure in Commodity Prices
What I admire about Energy Transfer among MLPs is its capacity to grow its DCF even during challenging commodity price environments. It is a testament to the benefits of its high-quality fee-based contracts and diverse asset portfolio and a key driver of my bullish outlook on the stock.
This was the case in its most recent Q3 results, with the partnership reporting a distributable cash flow of $1.99 billion, up slightly from the previous year. Essentially, Energy Transfer’s robust fee-based revenue model has helped shield its cash flow stability from commodity price volatility while registering record NGL and crude oil exports during the quarter.
Another significant catalyst to the company’s results was the successful integration of acquisitions, such as WTG Midstream Holdings, which added 6,000 miles of pipelines and nine gas processing plants with exceptional capacity. Organic growth also played a critical role. The company achieved record crude oil transportation volumes, and midstream-gathered volumes strengthened by expansions like the Orla East processing plant and the Midland-to-Cushing crude oil pipeline.
Energy Transfer Delivers Growth with Safe Distributions
If you’re drawn to the world of MLPs, you’re likely already familiar with Energy Transfer and its reputation for delivering generous distributions. In my view, the company continues to be a solid choice for income-focused investors, reinforcing my confidence in the stock’s bull case. Although Energy Transfer was forced to slash its distribution during the pandemic—a move that reflected industry-wide challenges, including plunging energy demand—the partnership has since steadily restored and increased its payouts.
In fact, by constantly raising its distributions over the past few years, Energy Transfer’s distribution-per-unit run rate of $1.29 hit a new high this year. At this level, the stock offers a rather hefty 7.1% yield. In the meantime, at this DPS level, Energy Transfer’s payout ratio remains quite healthy at just 42%, based on my DCF per share estimate of $3.10 for 2024. I came to this number based on Energy Transfer’s year-to-date results and Q4 outlook. In my view, this fairly low payout ratio signals that current distributions are safe. Moreover, it also implies that there is room for continued distribution per unit growth.
Balance Sheet Strength and Valuation Drive Returns
To address some investor concerns when it comes to investing in MLPs, it is true that the capital-intensive nature of the midstream energy business often leads to significant debt burdens. Energy Transfer faced such challenges before 2018, with net debt/EBITDA ratios in the high single digits. Yet, 2020’s distribution cut allowed the company to redirect funds toward debt reduction, with Energy Transfer reducing its net debt by $6 billion the following year. Today, its leverage ratio stands within its target range of 4.0-4.5x.
Considering today’s improved financial flexibility, I believe that Energy Transfer is positioned to focus on shareholder returns, including buybacks and distribution growth. The stock’s valuation further boosts its appeal. At a multiple of just ~6x based on this year’s expected DCF/unit, Energy Transfer seems to offer a notable margin of safety, especially with further DCF/unit growth expected in the coming years.
Is ET Stock a Buy?
Wall Street analysts appear quite positive towards Energy Transfer stock, which currently has a Strong Buy rating comprised of eight unanimous Buys assigned over the last three months. Despite the stock’s long rally over the past year, at $20.86, the average Energy Transfer stock forecast implies a 14.18% upside potential from current levels.
For the best guidance on buying and selling Energy Transfer stock, look to Gabe Moreen. He is the most accurate and profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 30.04% per rating and a perfect success rate score of 100%.
Final Thoughts
Overall, Energy Transfer is a resilient, high-yield opportunity in the MLP sector, supported by its extensive asset base and predictable cash flows. Its ability to weather commodity price pressures while expanding DCF is noteworthy and highlights the strength of its fee-based business model.
For these reasons, I trust its well-covered 7.1% yield and the potential for continued distribution growth. Along with units trading at an attractive valuation, I believe Energy Transfer presents a compelling case for income-focused investors seeking a hefty yield and growth potential in the energy infrastructure space.