Energy Transfer: A High-Yield Buy After a Pullback Amid AI-Driven Gas Demand and a Robust Growth Pipeline

In the shadow of a volatile market, Energy Transfer (ET) has emerged as a compelling contrarian opportunity for income-focused investors. The stock's recent pullback—despite a 5-year return of 294.42% and a 52-week gain of 11.55%—has created a rare entry point for those willing to look beyond short-term noise. With a forward yield of 4.8% and a distribution coverage ratio of 1.3x (based on 2025 DCF of $1.96 billion), ET offers a rare combination of income security and long-term growth potential.

Valuation Metrics: A Contrarian Bargain

Energy Transfer's current P/E ratio of 13.27 may seem elevated compared to its 5-year average of 10.37, but this metric fails to capture the company's structural advantages. The stock trades at a 15% discount to its 2025 enterprise value of $120.99 billion, a valuation that appears undemanding given its diversified asset base and fee-based revenue model. For context, the S&P 500's P/E ratio stands at 22.3x, highlighting ET's relative affordability.

Moreover, ET's beta of 0.79 suggests it's less volatile than the broader market, making it a defensive play in a high-interest-rate environment. The stock's 50-day moving average of $17.75 and 200-day average of $18.27 indicate a potential support level near $17.50, which could act as a catalyst for a rebound if macroeconomic fears ease.

AI-Driven Gas Demand: A Long-Term Catalyst

The most underappreciated driver of ET's value lies in the surge of AI-driven natural gas demand. As data centers consume 4% of U.S. electricity today and are projected to account for 12% by 2028, natural gas is fast becoming the backbone of this energy transition. According to the IEA, AI-optimized data centers will require 945 terawatt-hours of electricity by 2030—nearly double current consumption.

Energy Transfer is uniquely positioned to benefit from this trend. Its pipeline network spans 44 U.S. states, including key data center hubs like Virginia and Texas, where natural gas accounts for over 50% of electricity generation. The company's recent $5.3 billion Transwestern Pipeline expansion, connecting the Permian Basin to Arizona and New Mexico, is a direct response to the growing need for reliable gas supply to power AI infrastructure.

Hyperscalers like Meta and Amazon are already investing heavily in gas-fired power plants to meet their AI workloads. For example, Meta's $10-billion Louisiana data center is powered by three new natural gas plants, while Williams Co. (a peer of ET) is building 1 GW of gas-fired capacity for Ohio data centers. Energy Transfer's recent partnership with MidOcean Energy to develop the Lake Charles LNG project—funded 30% by a third party—further cements its role in this energy transition.

Distribution Security and Growth Pipeline

ET's 2025 distribution of $0.33 per unit (annualized at $1.32) is backed by a robust DCF margin of 30%, ensuring sustainability even in a downturn. The company's 2025 capital expenditures of $5 billion are largely growth-focused, with projects like the Nederland Flexport NGL Export Expansion and the Badger Processing Plant already boosting throughput.

The company's balance sheet also offers comfort: $2.51 billion in available borrowing capacity and a debt-to-EBITDA ratio of 3.2x, well within the 4.5x covenant threshold. Recent debt refinancing (e.g., the redemption of $500 million in preferred units) has further strengthened liquidity.

Why Buy Now?

The current pullback—driven by broader market jitters and short-term volatility in the energy sector—has created a mispricing opportunity. At $17.38, ET trades at a 20% discount to the $22.75 analyst price target, implying 30% upside. For income investors, the 4.8% yield is a compelling draw, especially as the Federal Reserve's rate-hike cycle appears to be nearing its peak.

Long-term, the AI-driven gas demand tailwind is structural. As data centers require 60% of new energy demand from gas over the next decade (vs. 25% from renewables), Energy Transfer's infrastructure will be indispensable. The company's recent LNG partnerships with Chevron and Kyushu Electric also open new revenue streams, with Lake Charles LNG expected to contribute $1.0 mtpa of contracted volumes.

Conclusion: A Contrarian Buy for Income and Growth

Energy Transfer is a rare blend of income security and long-term growth. Its undemanding valuation, strong distribution coverage, and exposure to AI-driven gas demand make it a standout in the energy infrastructure sector. For investors willing to ignore the noise and focus on fundamentals, ET offers a high-conviction opportunity to capitalize on the next phase of the energy transition.

Investment Thesis: Buy ET at $17.38 for a 4.8% yield and 30% upside potential, leveraging its contrarian valuation, AI-driven growth, and robust infrastructure.