Should You Buy Energy Transfer While It Trades Below $20?

Energy Transfer LP (ET) has been a standout performer in the midstream energy sector, but recent market volatility has pushed its stock price below $20, raising questions about whether now is the right time to buy. The company's strong financial performance, strategic investments, and robust growth prospects make a compelling case for investors, but there are also risks to consider. Let's delve into the key factors that could influence your decision.

Financial Performance and Valuation

Energy Transfer's financial metrics paint a picture of a company that is both undervalued and poised for growth. For the year ended December 31, 2024, the company reported a record adjusted EBITDA of $15.5 billion, hitting the upper end of its guidance range. This strong performance is underpinned by a diversified revenue stream, with 90% of its projected 2025 adjusted EBITDA derived from fee-based revenue, minimizing exposure to commodity price fluctuations.

The company's distribution yield of 7.6% for the next 12 months is particularly attractive to income-focused investors. This yield, combined with a relatively modest enterprise value-to-EBITDA multiple of 8.27x, suggests that Energy Transfer is trading at a discount compared to its peers. For instance, Enbridge and Enterprise Products Partners, both key players in the midstream sector, have higher valuations, indicating that Energy Transfer may be undervalued relative to its competitors.



Strategic Investments and Growth Prospects

Energy Transfer's recent strategic investments and partnerships are expected to significantly enhance its long-term growth prospects. One notable example is the long-term agreement with Cloudburst Data Centers, Inc. (CloudBurst) to provide natural gas to CloudBurst’s flagship AI-focused data center development. This partnership aligns with the growing demand for natural gas-powered data centers driven by the expansion of artificial intelligence (AI), positioning Energy Transfer to capitalize on this high-growth segment.

Additionally, the construction of the Hugh Brinson Pipeline, an intrastate natural gas pipeline connecting Permian Basin production to premier markets and trading hubs in Texas, further solidifies Energy Transfer’s strategic position. This pipeline is expected to enhance the company’s ability to transport natural gas efficiently, thereby increasing its market reach and revenue streams.



Market Risks and Uncertainties

While Energy Transfer's financial performance and strategic investments are impressive, there are several risks and uncertainties that investors should consider. The company's aggressive capital expenditure (CapEx) plans, which have increased from $3 billion in 2024 to a projected $5 billion in 2025, have raised concerns among market analysts. 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 and the potential for further escalation have cast uncertainty over Energy Transfer’s LNG export growth. Concerns about a potential economic slowdown are also affecting market sentiment, as reduced industrial demand could lead to lower utilization of Energy Transfer’s extensive energy infrastructure.

Conclusion

Energy Transfer LP's strong financial performance, strategic investments, and robust growth prospects make a compelling case for investors considering buying the stock while it trades below $20. The company's high distribution yield, modest valuation, and exposure to high-growth segments like AI-driven natural gas demand and global NGL exports suggest that it may be undervalued relative to its peers. However, investors should also consider the risks associated with the company's aggressive CapEx plans and the uncertainties surrounding international trade and economic conditions. As always, it's crucial to conduct thorough research and consider your investment goals and risk tolerance before making any decisions.