Energy Transfer (NYSE: ET) has demonstrated remarkable momentum in 2024, showing a nearly 20% increase this year alone. When factoring in the company’s robust distribution yield, the total return for investors escalates to approximately 25%. This trajectory notably outpaces the S&P 500’s own total return, which hovers just above 20%.
Though the master limited partnership (MLP) may not be trading at the bargain prices seen earlier in the year, it continues to possess ample potential for future growth. This makes it an attractive option for investors seeking passive income while also looking for value appreciation.
Key Drivers Behind Energy Transfer’s Growth
Energy Transfer is positioned for a strong fiscal year, highlighted by a 20% increase in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), reaching nearly $3.8 billion in the second quarter. The company’s distributable cash flow surged by 32%, exceeding $2 billion.
The primary catalyst for this robust performance has been strategic acquisitions. Earlier this year, Energy Transfer completed a $1.5 billion purchase of Lotus Midstream, followed by a significant $7.1 billion merger with Crestwood Equity Partners in November. These deals not only enhanced the company’s capacity but also contributed to record-high operational volumes during the second quarter. Energy Transfer has also reaped benefits from favorable market conditions and successful organic expansion projects.
The increased cash flow from these operations has allowed Energy Transfer to raise its distribution, which has grown over 3% in the past year, reinforcing its commitment to returning value to investors.
Furthermore, Energy Transfer’s healthy financial profile can be attributed to a lowering leverage ratio now sitting in the targeted range of 4.0 to 4.5 times. This robust financial footing has paved the way for continued expansion efforts. Recently, the company finalized a $3.1 billion acquisition of WTG Midstream and established a beneficial joint venture with Sunoco LP, aimed at optimizing crude oil and produced water assets in the Permian Basin. As a result, Energy Transfer anticipates an adjusted EBITDA growth exceeding 12%, targeting over $15 billion for the year.
Sustaining the Growth Trajectory
Despite the increase in unit price, Energy Transfer still offers a bargain valuation relative to competitors in the midstream sector. For instance, its forward enterprise value (EV) to EBITDA multiple stands at less than 8.0 times, significantly below the industry average range of 9.5x to 12x. This valuation disparity contributes to an appealing distribution yield of nearly 8%.
The low valuation raises questions about why Energy Transfer trades at such discounted levels. Over recent years, it has markedly strengthened its financial profile, evidenced by a decreasing leverage ratio. Simultaneously, the MLP is experiencing rapid earnings growth fueled by its consistent consolidation strategy and successful organic expansion.
Energy Transfer has augmented its growth potential through its recent acquisition of WTG Midstream, along with the ongoing development of additional expansion initiatives, including lower-carbon energy projects such as carbon capture and blue ammonia. Besides organic growth, the MLP retains the financial flexibility needed to pursue more accretive acquisitions.
Currently, Energy Transfer projects an annual increment of 3% to 5% in its distribution. Given its attractive yield, the MLP could feasibly deliver annual total returns surpassing 10%, should it continue its momentum in cash flow growth per share at this rate. Should its valuation align more closely with sector peers, additional upside remains highly plausible.
Why Consider Investing in Energy Transfer
The MLP has made considerable strides throughout 2024, driven by accelerating transformation and enhancing its growth profile. Despite the significant boost in unit price this year, it retains an appealing investment profile characterized by low valuations, a high yield, and strong growth indicators.
Investors should note that while Energy Transfer requires them to manage a Schedule K-1 Federal Tax Form each year—potentially complicating tax filings—the potential for significant income and future appreciation makes the investment incredibly worthwhile.
As you consider opportunities in the market, it’s essential to assess the potential of Energy Transfer. Its combination of rising cash flows, robust growth strategies, and appealing valuations places it on solid ground for investors seeking to capitalize on emerging trends in the energy sector.