Energy Transfer: Is It Time to Buy the Stock as AI Opportunity Emerges?

With a nearly 8% forward yield, Energy Transfer (NYSE: ET) is a perennial favorite among income-oriented investors, but the master limited partnership (MLP) also has a strong pipeline of growth projects in the works and is starting to see real opportunities to supply natural gas to companies building out artificial intelligence (AI) data centers.

Let's take a close look at the pipeline company's recent results and prospects, and why I think this is a great time to buy the stock.

Image source: Getty Images.

Project backlog continues to expand

On its earnings call, Energy Transfer revealed that it has inked multiple agreements to supply natural gas to large data center projects, including three with Oracle. Oracle is planning to be one of the most aggressive companies building out data centers in the coming years, so this is a great partnership to forge. Under the current long-term agreements in place, it will supply Oracle's three data centers with 900 Mcf (thousand cubic feet of natural gas) per day. It also has a 10-year deal readied with Fermi to supply about 300 Mcf per day of natural gas to its Project Matador hypergrid campus, currently under construction. That campus will be able to hold 15 data centers and plans to use a variety of energy sources.

Meanwhile, other large projects are coming along. Its $5.3 billion Desert Southwest pipeline project to supply natural gas from the Permian to Arizona and New Mexico is now fully subscribed under long-term agreements, and Energy Transfer could look to increase capacity in the future, given the high interest in the project. Meanwhile, its Hugh Brinson Pipeline, which has a capacity of 1.5 billion cubic feet per day (Bfc/d) takeaway from the Permian to markets in Texas, is on schedule to have phase 1 of the project online by the end of 2026. Given the demand from data centers, it thinks this could become a much larger project in the future. Meanwhile, it is also considering converting some natural gas liquid (NGL) pipelines coming up for renewal into natural gas pipelines, given the demand for natural gas it is seeing in the Permian region.

However, the company did say that it now wants to own just a 20% stake in its proposed Lake Charles LNG project. This now significantly lowers the odds of the project getting done, but part of the reason for this is that Energy Transfer is seeing some better opportunities elsewhere.

Overall, the company plans to spend $4.6 billion in growth capital expenditures (capex) this year, which is down from earlier guidance of $5 billion, as it is now able to do some projects less expensively than previously expected. Meanwhile, it plans to spend around $5 billion in capex this next year, mostly in its natural gas segment. It is looking to generate a mid-teens return from its projects.

Turning to its Q3 results, Energy Transfer's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter fell by 3% year over year to $3.84 billion. It said that excluding non-recurring items, adjusted EBITDA would have been flat.

Distributable cash flow (DCF) to partners, which is operating cash flow minus maintenance capex, dropped 4.5% to $1.9 billion, down from $1.99 billion a year ago. It paid out $1.14 billion in distributions in the quarter, good for a coverage ratio of nearly 1.7.

The company still expects its full-year EBITDA to be slightly below the low end of its original guidance of $16.1 billion to $16.5 billion, excluding its recent acquisition of Parkland by its subsidiary Sunoco (NYSE: SUN).

Why it's time to buy Energy Transfer stock

While its Q3 results were nothing to write home about, Energy Transfer's growing natural gas project backlog is exciting. The company is seeing a big opportunity from the growth of AI data centers, and it's one of the best-positioned midstream companies to take advantage of this. With expected mid-teens returns on these projects, the company should see solid growth in the coming years.

At the same time, the company's distribution is well covered by its distributable cash flow, and its balance sheet is in solid shape. The stock is also cheap both by historical standards and compared to peers, trading at a forward enterprise value (EV)-to-EBITDA multiple of just 7.8 times 2026 analyst estimates for $17.1 billion in adjusted EBITDA. Notably, that's nearly half the 13.7 times EV/EBITDA multiple the average MLP traded at between 2011 and 2016.

Given its growth outlook, robust yield, and cheap valuation, Energy Transfer looks like an attractive buy at current levels.

Geoffrey Seiler has positions in Energy Transfer and Sunoco. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.