Is Energy Transfer a buy after the recent payout increase?

Following the election and the release of third quarter results Energy transfer (ET -0.35%) saw the stock hit a 52-week high and, as of this writing, is up more than 25% year-over-year, without even taking into account the hefty payout. Speaking of distributions: The Master Limited Partnership (MLP) also just mentioned this.

With a likely more favorable regulatory environment and growing energy needs driven by demand for artificial intelligence (AI), we take a closer look at this pipeline company’s recent results and whether now is a good time to buy the stock.

Growth opportunities ahead of us

Energy Transfer delivered solid results in the third quarter, with adjusted EBITDA increasing to $3.96 billion in the quarter. Distributable cash flow (DCF) to partners, the amount the company generates before investments in growth projects (capex), increased by $4 million to $1.99 billion. Volumes increased significantly across all systems, with several volume records set during the quarter. These included a 25% year-over-year increase in crude oil volumes, a 6% increase in midstream volumes collected and a 12% increase in NGL fractionation volumes.

In October, the company increased its payout per share by 3.2% year-over-year to $0.3225. That’s good for a forward yield of about 7.4%.

Enterprise paid out $1.1 billion in distributions to shareholders during the quarter, giving it a payout ratio of 1.8. After paying distributions, Energy Transfer had excess cash flow of $890 million, of which the company spent $724 million on growth projects in the quarter. This shows once again that Energy Transfer’s sales are well covered.

Looking ahead, Energy Transfer maintained its full-year EBITDA guidance of $15.3 billion to $15.5 billion. The original forecast at the beginning of the year was for EBITDA between $14.5 billion and $14.8 billion. However, the company said there is potential upside in the fourth quarter due to optimization efforts and natural gas spreads, but is conservative on spreads at this point.

Energy Transfer has actually lowered its growth capital expenditure (capex) estimate for the year and now expects to spend between $2.8 billion and $3 billion. That’s down from the previous forecast of $3 billion to $3.2 billion. However, there was more talk of a future run rate of $2.5 billion to $3.5 billion, versus a previous forecast of $2 billion to $3 billion.

The company said it is seeing increasing power demand in several of its pipelines driven by AI and data center power needs, and that it is one of the best-positioned companies to meet this demand given its natural gas pipeline network. It says it has received requests to connect to about 45 power plants it doesn’t currently serve in 11 states and more than 40 potential data centers in 10 states.

Meanwhile, co-CEO Marshall McCrea said the Trump administration will bring a “fresh breath” to the oil and gas industry by easing regulations and enforcement measures. In particular, he believes this will help the company realize LNG (liquefied natural gas) export projects.

Is it time to buy Energy Transfer?

With a growing number of growth project opportunities and a likely friendlier regulatory environment, Energy Transfer is in one of its strongest positions in a long time. The expansion of AI infrastructure is underway, and while some companies are looking to meet their energy needs through nuclear energy, natural gas will also play a large role. Natural gas projects can be completed more quickly than nuclear power projects, while Enterprise, with its systems around cheap associated gas from the Permian Basin, is well positioned to exploit AI energy potential.

The stock is now trading at an attractive enterprise value-to-EBITDA ratio of just 8.3. Although this value has increased recently, the value is well below the value at which Energy Transfer traded before the COVID-19 pandemic and well below the average value of 13.7 that midstream MLPs traded at between 2011 and 2011 were traded in 2016.

ET EV to EBITDA (Forward) data from YCharts

Energy Transfer still appears to be a buy given its valuation, attractive yield, growth opportunities and likely improving regulatory environment.