Should You Buy Energy Transfer While It's Below $17.50?

Natural gas production in the U.S. is on an upward trajectory, fueled by advances in shale development and drilling technologies. As domestic energy demand surges, the U.S. is now the world's largest natural gas producer.

This comes at the same time that the build-out of data centers, manufacturing, and infrastructure projects accelerates nationwide. Technology companies are turning to natural gas because it offers reliable, cleaner-burning energy that can be generated on-site.

The country's natural gas presence continues to grow, supported by an expanding network of pipelines, processing facilities, and long-haul infrastructure built to move energy where it's needed most.

Against this backdrop, Energy Transfer (NYSE: ET) is positioned as a key player in a sector that is becoming increasingly essential to America's energy strategy. The natural gas company boasts an attractive 8% dividend yield. However, the stock has fallen 16% year to date.

With shares trading under $17.50, is Energy Transfer a buy? Let's dive into the business to find out.

Energy Transfer's expansive pipeline business

Energy Transfer owns and operates over 140,000 miles of pipelines across the United States. The company operates in the midstream segment of the oil and gas industry, serving as a highway for transporting products from energy producers to end consumers.

The company transports raw energy products, such as natural gas, natural gas liquids (NGLs), crude oil, and refined products. It generates revenue through fee-based contracts, with about 90% of its earnings from these fees. This gives the company visibility into future earnings and a steady stream of revenue. It also means the company is buffered against the volatility of crude oil and natural gas prices.

The reliability of this fee-based revenue underpins Energy Transfer's ability to generate distributable cash flow, which is key to powering its attractive high dividend yield. This gives Energy Transfer a stable foundation and the ability to expand and increase its future payouts.

How AI is driving future growth

U.S. natural gas production has surged over the past two decades, driven by advances in horizontal drilling and hydraulic fracturing that have unlocked vast shale resources. In addition, recent geopolitical tensions involving Russia have made U.S. LNG exports a lifeline for Europe as it shifts away from Russian pipeline gas.

In addition to global demand, Energy Transfer is positioning itself domestically to meet the demand for energy to power hyperscalers' expanding data center footprints. The company has entered into multiple long-term agreements with Oracle to supply natural gas to three U.S. data centers, including two in Texas.

Image source: Getty Images.

It has also entered into a 10-year agreement with Fermi America, an energy and infrastructure company aiming to build massive, hybrid power-and-data campuses to support next-generation computing and AI in the U.S. In the last year, it has contracted over 6 billion cubic feet (bcf) per day of pipeline capacity with demand-pull customers. These contracts have a weighted-average life of over 18 years and are projected to generate more than $25 billion in transportation fee revenue.

To meet growing demand, Energy Transfer has agreed to move forward with a major project to expand its Transwestern Pipeline. The Desert Southwest pipeline expansion will increase natural gas supply to markets in Arizona and New Mexico from the Permian Basin. The expansion involves constructing 516 miles of pipeline with a design capacity of 1.5 billion cubic feet per day and an expected cost of approximately $5.3 billion. The company expects this to come online in late 2029.

Is Energy Transfer a buy?

Energy Transfer is a solid dividend stock for investors seeking passive income. It operates as a master limited partnership (MLP), which is why it can offer appealing yields.

However, it also comes with specific reporting requirements that could delay and complicate your taxes come tax season. Profits are distributed to investors (called unitholders), typically via a Schedule K-1 form, which can create extra work for investors accustomed to simpler tax forms. This is something to keep in mind.

That said, Energy Transfer is one of the largest U.S. midstream operators and is positioned to meet growing demand for natural gas. The company is expanding its footprint and securing more contracts, making it a solid energy stock with an attractive dividend that makes it a great choice for income-focused investors.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.