Energy Transfer: A Pillar of Long-Term Passive Income in the Midstream Sector

Energy Transfer LP (NYSE: ET) has long been a cornerstone for investors seeking stable passive income, and its recent financial performance and strategic initiatives reinforce its appeal. With a history of consistent distribution growth, robust cash flow generation, and a disciplined approach to capital allocation, Energy Transfer presents a compelling case for long-term income-focused investors. However, its high leverage and exposure to commodity volatility necessitate a nuanced evaluation of risks and rewards.

Cash Flow Stability: A Foundation for Sustainable Distributions

Energy Transfer's operational resilience is underscored by its strong cash flow generation. In 2024, net cash from operating activities surged to $11.5 billion, up from $9.56 billion in 2023Energy Transfer Expects to Deliver Another Big Growth^[2], despite capital expenditures of $4.16 billionEnergy Transfer Expects to Deliver Another Big Growth^[2]. This ability to maintain positive cash flow amid significant reinvestment highlights the company's fee-based business model, which derives 90% of its EBITDA from fixed-fee contractsEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]. Such contracts insulate Energy Transfer from commodity price swings, ensuring predictable cash flows to fund distributions.

The company's 2024 adjusted EBITDA of $15.5 billion—a 13% year-over-year increaseEnergy Transfer Reports Fourth Quarter 2024 Results and …^[4]—further solidifies its financial foundation. This growth, coupled with a debt-to-EBITDA ratio of 4.14Energy Transfer Expects to Deliver Another Big Growth^[2], places Energy Transfer within its target leverage range of 4.0x to 4.5xEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]. A recent credit rating upgrade to Baa2 by Moody'sDOE Finalizes Energy Efficiency Standards for Distribution Transformers^[3] reflects improved creditworthiness, reducing the risk of refinancing challenges and supporting long-term distribution sustainability.

Distribution Reliability: A Track Record of Gradual Growth

Energy Transfer's distribution history demonstrates a commitment to rewarding unitholders. Over the past five years, quarterly payouts have risen incrementally, from $0.20 in Q2 2022 to $0.33 in Q2 2025Energy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]. This trajectory, while modest, aligns with the company's conservative approach to capital preservation. The 2025 annualized distribution of $1.32 per shareEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1] yields approximately 7.6% at the current unit price of $17.39ENERGY TRANSFER STOCK FORECAST 2025, 2026-2036^[5], making it one of the most attractive yields in the midstream sector.

The company's distribution coverage ratio—estimated at 1.5x to 2xEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]—provides a buffer against short-term volatility. However, a payout ratio of 94.5%Energy Transfer LP (ET) Growth Strategy, LNG Expansion^[1] raises concerns about long-term sustainability, particularly if cash flow growth slows. Energy Transfer's 2025 capital expenditure plan of $5 billionEnergy Transfer Expects to Deliver Another Big Growth^[2], focused on organic projects like the Hugh Brinson Pipeline and Mustang Draw processing plant, aims to offset this risk by boosting future distributable cash flow.

Growth Catalysts: Infrastructure and Diversification

Energy Transfer's 2025–2026 growth strategy hinges on expanding its fee-based infrastructure. The $5 billion in growth capital expendituresEnergy Transfer Expects to Deliver Another Big Growth^[2] will fund projects such as the Nederland Flexport expansion and the Lake Charles LNG terminal, which has secured 20-year contracts with Chevron and Kyushu ElectricEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]. These projects are expected to contribute $1–1.5 billion annually to EBITDA once operationalEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1], enhancing long-term cash flow visibility.

Diversification into emerging markets also strengthens Energy Transfer's growth profile. The company is pursuing gas supply contracts with AI data centersEnergy Transfer Expects to Deliver Another Big Growth^[2], tapping into the surging demand for reliable energy in the tech sector. Additionally, its $1.2 billion investment in Permian Basin processing plantsEnergy Transfer Expects to Deliver Another Big Growth^[2] positions it to capitalize on the region's production resilience, even as broader oil markets face cyclical headwinds.

Risks and Mitigants: Navigating Challenges

Despite its strengths, Energy Transfer faces notable risks. Its $59.8 billion debt loadEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1] could constrain flexibility if interest rates rise further, though its disciplined refinancing strategy—evidenced by a recent $3 billion senior note issuanceEnergy Transfer LP (ET) Growth Strategy, LNG Expansion^[1]—mitigates this threat. Regulatory and environmental scrutiny, particularly for pipelines like Dakota AccessEnergy Transfer Expects to Deliver Another Big Growth^[2], also poses operational risks. However, the company's focus on sustainability, including compliance with new DOE transformer efficiency standardsDOE Finalizes Energy Efficiency Standards for Distribution Transformers^[3], aligns it with evolving industry trends.

Commodity volatility remains a wildcard, as 10% of Energy Transfer's EBITDA is exposed to oil and gas price fluctuationsEnergy Transfer Expects to Deliver Another Big Growth^[2]. While this is relatively low compared to peers, a prolonged downturn could pressure throughput volumes. Fortunately, the company's 2025 guidance—adjusted EBITDA of $16.1–16.5 billionEnergy Transfer Reports Fourth Quarter 2024 Results and …^[4]—suggests confidence in its ability to navigate macroeconomic uncertainties.

Conclusion: A Strategic Play for Passive Income

Energy Transfer's combination of stable cash flows, reliable distribution growth, and strategic infrastructure investments makes it a compelling option for long-term passive income seekers. While its high leverage and commodity exposure warrant caution, the company's fee-based model, credit profile, and growth pipeline provide a strong foundation for sustaining and potentially increasing distributions. Investors willing to tolerate moderate risk for an 8% yieldENERGY TRANSFER STOCK FORECAST 2025, 2026-2036^[5] should closely monitor its progress on capital projects and debt management. For those prioritizing income stability, Energy Transfer remains a standout in the midstream sector.