Energy Transfer's Resilient Business Model, High Yield, and Strong Distributions Make it a Great Long-Term Buy

Energy Transfer is a midstream pipeline operator with a stable business model, generating revenue through "toll road" pipelines. It returns most of its cash flow to investors through distributions and still looks cheap relative to its growth potential. The company has rallied 165% over the past five years and delivered a total return of 291%, outperforming the S&P 500. Energy Transfer is a great long-term buy due to its resilient and growing business, high yield as a hedge against lower rates, and potential for expansion in the Permian Basin and integration of recent acquisitions.

Energy Transfer LP (ET), a midstream pipeline operator, has been a standout performer in the energy sector, delivering impressive returns to investors. The company's stable business model, driven by "toll road" pipelines, has positioned it well for long-term growth and income generation.

Stable Business Model and Growth Potential

Energy Transfer's revenue is primarily generated through its fee-based model, with 90% of EBITDA derived from take-or-pay contracts. This structure ensures stable cash flows and low leverage, with a target leverage ratio of 4.0–4.5x [1]. The company's recent expansion projects, such as the $5.3 billion Desert Southwest pipeline, are aimed at addressing surging natural gas demand in the Southwest U.S., particularly from the Permian Basin [1].

Financial Strength and High Yield

Energy Transfer's financial health is robust, with a healthy distributable cash flow (DCF) coverage ratio of 1.7x in Q2 2025. The company's dividend yield of 7.29% as of July 2025 provides a compelling income stream for investors [1]. Additionally, the company's conservative leverage profile and proactive cost reduction measures, such as redeeming $500 million of high-yield preferred units, further strengthen its credit profile [1].

Valuation and Investment Thesis

Energy Transfer trades at a forward EV/EBITDA multiple of 8.1x, significantly below its historical average of 13.7x for MLPs. This undervaluation, driven by sector-wide skepticism and disciplined capital allocation, presents an attractive investment opportunity [1]. The company's recent performance, including a 165% rally over the past five years and a total return of 291%, demonstrates its resilience and growth potential [1].

Expansion in the Permian Basin

Energy Transfer's expansion plans in the Permian Basin are particularly noteworthy. The company has announced a positive financial investment decision (FID) for the expansion of its Transwestern Pipeline to increase the supply of natural gas to markets throughout Arizona and New Mexico [2]. This project, expected to cost approximately $5.3 billion, will enhance system reliability and provide additional optionality serving rapidly growing demand in the Southwestern U.S. region [2].

Conclusion

Energy Transfer LP's stable business model, strong financials, and attractive valuation make it a compelling long-term investment. With a focus on income generation, growth potential, and expansion in the Permian Basin, the company is well-positioned to capitalize on the energy transition. For investors seeking income with growth, Energy Transfer's combination of yield, capital discipline, and market-leading infrastructure makes it a compelling buy in today's shifting energy landscape.

References:
[1] https://www.ainvest.com/news/energy-transfer-surging-growth-projects-unlocking-long-term-income-investors-2508/
[2] https://www.worldpipelines.com/project-news/06082025/energy-transfer-announces-expansion-of-permian-basin-natural-gas-pipeline/