Energy Transfer (ET 0.10%) is having a monster year. Units of the master limited partnership (MLP) have rallied over 35% in 2024. Add in its high-yielding distribution, and the total return is nearly 50%.
Several factors have fueled the MLP's rally, which has picked up steam following the election. Here's a look at whether Energy Transfer has the fuel to continue rising in 2025.
Acquisitions are fueling a record year
Energy Transfer is having a strong year operationally and financially. The MLP set several volume records in the third quarter, fueled by organic growth projects and acquisitions. It acquired fellow MLP Crestwood Equity Partners in a $7.1 billion deal last November and wrapped up its nearly $3.1 billion deal for WTG Midstream in July. It has also completed a couple of processing optimization projects: the Red Lake III processing plant, and the Midland to Cushing pipe connection project.
These growth drivers have the MLP on track to increase its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 12% at the midpoint of its guidance range this year. That has given it the fuel to raise its distribution by more than 3%, strengthen its balance sheet, and continue making accretive new investments.
Energy Transfer expects to invest $2.8 billion to $3 billion into growth capital projects in 2024. It has secured several new projects this year, including recently approving its ninth natural gas liquids fractionator, which should come online in 2026. It now has several projects on track to enter commercial service over the next two years, providing increased visibility into its future growth.
Those projects are likely only the beginning. The company believes that the election results will be a catalyst for approving additional expansion projects, including its long-delayed Lake Charles LNG export terminal. In addition, it's seeing a surge in demand for additional gas pipeline capacity, fueled by growing power demand and AI data centers.
The value proposition
While Energy Transfer's unit price has surged this year, it still trades at a reasonable valuation compared to its peers:
ET EV to EBITDA (Forward) data by YCharts
As that chart shows, Energy Transfer trades at less than 9 times its forward enterprise value-to-EBITDA, which is near the bottom of the barrel in its peer group. That dirt cheap valuation is why the MLP still has such a high-yielding distribution (6.8%).
There's no noticeable reason for the valuation discount. Energy Transfer has similar strong financial metrics to those of its peers. It covers its high-yielding distribution with cash flow by around 2 times, which is higher than some of its MLP peers. Meanwhile, its leverage ratio is trending toward the low end of its 4.0 to 4.5 times target range.
Further, as noted, the MLP has strong growth prospects that are growing stronger. For example, its WTG Midstream deal alone will add $0.04 per share to its distributable cash flow next year, which will increase to $0.07 per share by 2027. That's enough to support the MLP's current distribution growth rate of $0.01 per unit annually (3% to 5% per year) for the next several years. On top of that, it has visible organic cash flow growth coming from its current slate of capital projects, which will provide a lift through 2026.
In addition to that secured growth, Energy Transfer has a growing pipeline of development projects, like Lake Charles LNG and AI-related gas expansions. It also has the financial flexibility to continue making accretive acquisitions as opportunities arise.
Still a compelling opportunity
While units of Energy Transfer have rallied sharply this year, it still trades at a relatively attractive valuation, especially considering its growth prospects. It also continues to offer an enticing income stream. Because of that, Energy Transfer remains a compelling investment opportunity for those comfortable receiving the Schedule K-1 federal tax form the MLP sends its investors each year.
