Why Investors Should Choose PAA and WES Over Energy Transfer for High-Yield Energy Income

In the high-yield energy income space, investors often face a critical decision: balancing risk-adjusted returns with long-term sustainability. While Energy Transfer (ET) remains a dominant player in the midstream sector, Plains All American (PAA) and Western Midstream (WES) present compelling alternatives. This analysis evaluates these three companies through the lenses of financial stability, yield potential, and long-term distribution growth, arguing why PAA and WES deserve a more prominent role in energy-focused portfolios.

Financial Stability: Leverage and Liquidity

Financial stability is the bedrock of any high-yield investment. Energy Transfer's leverage ratio, while not explicitly disclosed, is inferred to be significantly higher than its peers. With $60.7 billion in long-term debt and Adjusted EBITDA of $3.87 billion for Q2 2025, ET's debt-to-EBITDA ratio likely exceeds 15x, a level that raises concerns for income-focused investors. In contrast, PAA and WES maintain far healthier balance sheets.

Plains All American reported a leverage ratio of 3.3x as of June 30, 2025, comfortably within its target range of 3.25x to 3.75x. This is bolstered by a $3.75 billion NGL divestiture expected to close in Q1 2026, which will fund bolt-on acquisitions and unit repurchases. Western Midstream, meanwhile, reaffirmed a 3.0x pro forma leverage ratio post-Aris acquisition, with $6.9 billion in long-term debt and $2.5 billion in 2025 Adjusted EBITDA guidance. Both companies also demonstrated disciplined debt management: PAA's $453 million in Q2 2025 capital expenditures were offset by strategic asset sales, while WES retired $337 million in senior notes in June 2025.

Yield Potential: Distributions and Free Cash Flow

High-yield energy income hinges on consistent and growing distributions. Energy Transfer's $0.33 per unit quarterly distribution (or $1.32 annualized) appears modest compared to PAA's $0.21 per unit and WES's $0.910 per unit. However, yield alone is insufficient without the backing of robust Free Cash Flow (FCF).

PAA's $0.66 DCF per unit in Q2 2025 (up 14% YoY) and WES's $388.4 million in FCF for the same period underscore their ability to sustain and grow distributions. WES's $1.275 billion to $1.475 billion FCF guidance for 2025 further reinforces its capacity to reward unitholders. Energy Transfer, by contrast, reported $348 million in Adjusted Free Cash Flow for Q2 2025—a 15% decline YoY—raising questions about its ability to maintain its $1.32 annualized yield without compromising growth.

Long-Term Distribution Growth: Strategic Positioning

Sustainable distribution growth requires a combination of operational efficiency and strategic capital allocation. PAA's $5.15 billion CAD NGL sale and 40% stake in BridgeTex Pipeline position it to enhance free cash flow durability. The BridgeTex acquisition, in particular, strengthens PAA's presence in the high-growth Permian Basin, a critical driver of long-term cash flow.

Western Midstream's $2.0 billion Aris Water Solutions acquisition, expected to close in Q4 2025, is another catalyst. The deal is projected to be accretive to 2026 FCF per unit and deliver $40 million in annualized cost synergies. WES's $5.0 billion 2025 capital expenditure plan also prioritizes organic projects like the North Loving Train II, which will expand its processing capacity in the Delaware Basin.

Energy Transfer's $5 billion growth capex for 2025 is ambitious, but its $60.7 billion debt load and $3.87 billion Q2 EBITDA suggest a heavier reliance on debt financing. While ET's $2.51 billion in available credit provides flexibility, its leverage profile limits its ability to pursue accretive opportunities without risking credit downgrades.

Credit Ratings and Risk Mitigation

Investment-grade credit ratings are a critical differentiator. Both PAA and WES explicitly highlighted their investment-grade status, with WES noting that its long-term contract portfolio and fee-based revenue model insulate it from commodity price volatility. Energy Transfer's ratings were not disclosed, but its $60.7 billion debt and $3.87 billion EBITDA imply a higher risk profile. A downgrade could increase borrowing costs and erode unitholder value.

Conclusion: A Case for PAA and WES

For income-focused investors, PAA and WES offer a superior risk-reward profile compared to Energy Transfer. Their lower leverage ratios, stronger Free Cash Flow generation, and strategic capital allocation position them to deliver higher and more sustainable distributions. Energy Transfer, while a market leader, faces headwinds from its elevated debt load and weaker FCF performance, which could constrain its ability to grow distributions in the long term.

Investment Advice: Consider allocating a larger portion of energy income portfolios to PAA and WES, particularly for investors seeking high-yield stability and long-term growth. Energy Transfer should be approached with caution, given its structural leverage challenges. As the midstream sector evolves, companies with disciplined balance sheets and clear growth trajectories will outperform.