Stock Performance and Market Reaction
Energy Transfer (ET), a key player in the midstream sector, has experienced a notable downturn in its stock value, witnessing a 16% decline over the past month. This significant drop has led to underperformance compared to the broader midstream Master Limited Partnership (MLP) sector. The primary contributors to this downturn include investor concerns over the company’s aggressive capital expenditure (CapEx) plans and growing uncertainty in the global trade landscape.
ET’s management recently announced a substantial increase in growth CapEx, jumping from $3 billion in 2024 to a projected $5 billion in 2025. While the company maintains that these investments will yield mid-teens rates of return, market analysts remain skeptical about achieving such high profitability. Many investors believe that redirecting funds toward share repurchases or higher distributions, as seen with competitors like MPLX and Plains All American, would have been a more favorable approach.
Additionally, tensions surrounding international trade have further impacted ET’s outlook. The recent trade conflicts between the United States and several major trading partners, with the potential for further escalation, have cast uncertainty over ET’s liquefied natural gas (LNG) export growth. Concerns about a potential economic slowdown are also affecting market sentiment, as reduced industrial demand could lead to lower utilization of ET’s extensive energy infrastructure.
Financial Performance and Strategic Investments
Despite the market concerns, Energy Transfer reported strong financial results for 2024, with a record adjusted EBITDA of $15.5 billion, hitting the upper end of its guidance range. The company remains well-positioned within the industry, with 90% of its projected 2025 adjusted EBITDA derived from fee-based revenue, minimizing exposure to fluctuations in commodity prices.
ET’s financial stability is further supported by a strong balance sheet, with leverage ratios falling within the 4.0x to 4.5x range. The company’s revenue streams are well-diversified, with 20% of EBITDA tied to crude oil, 27% to natural gas liquids (NGL) and refined products, 19% to midstream operations, and 21% to natural gas. The remaining 13% comes from investments in entities such as USA Compression Partners and Sunoco.
The firm’s capital allocation strategy highlights major investments in midstream operations, NGL and refined products, and interstate natural gas transportation. Management has identified key growth areas, including rising production in the Permian Basin, increasing demand for natural gas-powered data centers driven by artificial intelligence (AI) expansion, and heightened global demand for U.S. NGL exports. These strategic initiatives align ET with some of the most prominent growth drivers in the energy sector today.
Valuation and Growth Prospects
Energy Transfer’s management remains optimistic about its investment strategy, expecting strong returns on capital expenditures. The company anticipates an annualized EBITDA growth of approximately 5%, which is expected to support distribution increases within its target range of 3-5% annually. Analysts forecast a compounded annual growth rate (CAGR) of 4.2% in distributions through 2029, underpinned by a 6.7% CAGR in distributable cash flow per unit.
The company’s current valuation appears attractive, offering a 7.6% next-12-month distribution yield and trading at an 8.27x enterprise value-to-EBITDA multiple. Compared to peers such as Enbridge, Enterprise Products Partners, Kinder Morgan, and Targa Resources, ET’s valuation remains relatively modest despite its strong diversification and exposure to high-growth segments like AI-driven natural gas demand and global NGL exports.
While some concerns persist regarding the possibility of an economic downturn, Energy Transfer’s stable cash flow model, largely insulated from commodity price volatility, provides a cushion against market fluctuations. Even if return expectations on growth projects are not fully realized, the firm’s strong yield and growth potential suggest a favorable long-term outlook for investors.
