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The midstream sector of the oil and gas industry plays a pivotal role in connecting upstream production with downstream refining and distribution. It involves the transportation, storage, and wholesale marketing of crude oil, natural gas, and natural gas liquids (NGLs). Midstream companies manage extensive pipeline networks, storage facilities, and processing plants to ensure the efficient and secure movement of hydrocarbons from production sites to end-users.
This Midstream sector is known for its capital-intensive infrastructure, long-term contracts and relatively stable cash flows, which contribute to its appeal as an investment opportunity. Two prominent operators in the United States midstream space are Plains All American PAA and Energy Transfer ET.
Plains All American Pipeline specializes in the transportation and storage of crude oil and NGLs throughout North America. Its expansive network of pipelines and terminals is concentrated in prolific production areas like the Permian Basin, a key driver of its throughput volumes. The company derives most of its cash flow from long-term, fee-based contracts, which help to minimize its exposure to fluctuations in commodity prices.
Energy Transfer is a diversified midstream company with operations spanning crude oil, NGLs, refined products and natural gas pipelines, along with storage and processing facilities. Energy Transfer also has a strong presence in the Permian Basin. The firm also operates the Dakota Access Pipeline and owns interests in export terminals, giving it an expansive footprint and additional avenues for cash generation.
As production volumes of hydrocarbons continue to increase in the United States, demand for midstream services remains strong. In the given backdrop, let’s closely compare the fundamentals of these two stocks to determine, which one is a better for investment now.
The Zacks Consensus Estimate for Plains All American Pipeline’s 2025 and 2026 earnings has moved up by 7.9% and 2.7%, respectively, in the past 90 days.
The Zacks Consensus Estimate for Energy Transfer’s 2025 and 2026 earnings has declined 2.8% and 4.1%, respectively, in the past 90 days.
Oil and gas midstream services is a capital-intensive industry, and the operators have to make substantial investments to develop new pipelines, and upgrade, maintain and create storage facilities.
Plains All American Pipeline remains focused on disciplined capital investments, anticipating full-year 2025 investment and maintenance capital of $400 million and $240 million, respectively. It is currently focusing on smaller projects to improve returns across its system.
Energy Transfer has made significant capital investments in the past five years. For 2025, the firm expects its growth capital expenditures to be nearly $5 billion. Maintenance capital expenditures for 2025 are expected to be approximately $1.1 billion.
ROE measures how efficiently the company is utilizing its unitholders’ funds to generate profits. PAA’s current ROE is 11.82% compared with ET’s ROE of 11.56%. It is evident that PAA is utilizing the funds comparatively better than ET.
The oil and gas midstream industry is capital-intensive; the firms operating in this space need to borrow to fund their capital projects. At present, ET’s debt to capital is 56.66% compared with its industry average of 57.51%. PAA’s debt to capital is 35.52%.
Energy Transfer currently has a higher debt compared to PAA to run its operations, which raises some concerns about ET’s financial flexibility. However, ET has been actively working to reduce its leverage in recent years.
Midstream companies generate substantial cash flow primarily due to fee-based contracts and regulated tariffs that constitu-te a significant portion of their income. Both firms generate cash flows, a substantial portion of which is distributed among their unitholders.
Plains All American Pipeline’s current cash distribution yield is 8.85%. The firm has raised its distribution every year for the last five years. The annualized average distribution growth for the last five years is 17.96%.
Energy Transfer’s current cash distribution yield is 7.73%. The firm has raised its distribution every year for the last five years. The annualized average distribution growth for the last five years is 14.99%.
Plains All American Pipeline’s units are somewhat inexpensive relative to its industry. PAA’s current trailing 12-month Enterprise Value/Earnings before Interest, Tax Depreciation, and Amortization (EV/EBITDA) is 7.77X compared with the industry average of 9.68X. This indicates that the firm is presently undervalued compared with its industry.
Energy Transfer is trading at an EV/EBITDA of 7.86X, at a discount compared with its industry.
In the year-to-date period, Plains All American Pipeline’s units have gained 2.2%, while Energy Transfer’s units have declined 12.6%. The industry has declined 9.4% in the same time frame.
It is evident that PAA’s unit has demonstrated resilience in 2025, maintaining a slight positive return, whereas ET’s unit has experienced a notable decline.
PAA and ET are efficiently providing services to their customers in their service regions. Both have an extensive network in the prolific Permian Basin.
Plains All American Pipeline primarily operates in the transportation and storage of crude oil and natural gas liquids, with a fee-based model that offers some insulation from commodity price fluctuations. Energy Transfer has a more diversified portfolio, including natural gas pipelines and storage, but has faced challenges related to debt levels.
Even though both stocks currently carry a Zacks Rank #3 (Hold). Plains All American Pipeline is a better pick for investors based on positive movement in estimates, lower debt levels, stable cash distribution, and is still trading at a discount compared with Energy Transfer and its industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
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