Energy Transfer Enterprise Contemplates Intensifying Financial Expansion. Is this the Opportune Moment to Invest in the Shares?
Revamped Analysis: Energy Transfer's Growth Push in 2025
(Embracing Growth Opportunities in Artificial Intelligence and Data Center Evolution)
Ever eager to seize prospects as they unfurl, Energy Transfer isn't about to shy away from growth, with 2025 shaping up as a potential boom year. In the company's recently released earnings, the focus was on supercharged growth due to a plethora of promising ventures, with AI-driven energy needs taking center stage. Let's delve into these results to gauge if this could be an opportune time to invest in the shares.
Riding the Growth Wave
Prepared to dip their toes into prodigious investment around $5 billion in capex on expansion projects, marking a notable leap from the $3 billion spent in 2024. The majority of Energy Transfer's spending will be directed towards the Permian Basin, where it will focus on expands, enhancements, and expansions in takeaway capacity, processing, gas treatment, and compression. Notable projects will include the Hugh Brinson pipeline, enhancing natural gas takeaway from the Permian Basin and connecting to Energy Transfer's intrastate natural gas pipeline network.
Moreover, Energy Transfer announced a cooperation agreement with CloudBurst Data Centers to provide natural gas to their AI-focused data center developments in central Texas, supplying 450,000 MMBtu per day of natural gas through the Oasis pipeline. This will be the company's initial foray into direct agreements with data center providers and follows an onslaught of requests from over 70 prospective data centers in 12 states, in addition to connection inquiries from approximately 62 power plants in 13 states that Energy Transfer does not currently cater to, as well as from 15 plants it already serves. The deal is subject to CloudBurst reaching a final investment decision, with the facility anticipated to be operational in the third quarter of 2026.
Metric Milestones
In the fourth quarter, Energy Transfer saw its adjusted EBITDA climb 8% to $3.88 billion. This metric, considered a priority for midstream companies, is an essential measure of growth.
In January, Energy Transfer raised its per-share quarterly distribution by 3% year-on-year to $0.325. This equates to a forward yield of approximately 6.5% at current market prices, with the company continuing to anticipate a yearly increase of 3% to 5%. Energy Transfer's distribution is well-supported by its DCF to partners.
Looking ahead, Energy Transfer forecasts full-year EBITDA to sit quietly between $16.1 billion and $16.5 billion, representing fairly modest growth of around 5%. The company has form in presenting conservative guidance and then upending it during the year, with the bulk of its current expansion projects expected to come online in 2026, promising a swell in growth from 2026 and 2027.
Should Energy Transfer Stock Be a Buy?
With an array of appealing projects now in the mix, midstream players like Energy Transfer and Enterprise Products Partners are ramping up their growth capex. Energy Transfer seeks mid-teen returns on its projects, which would translate to roughly $750 million in incremental EBITDA once fully operational. This demonstrates the favorable marketplace faith in natural gas demand increase.
Although the step-up in growth capex is marked, Energy Transfer should be close to covering this $5 billion outlay and its $4.5 billion in distributions with its DCF given its projected 5% growth in EBITDA. With a solid financial position and leverage, the company exhibits an air of readiness to tackle the growth challenges ahead.
From a valuation perspective, the stock trades at an EV-to-EBITDA multiple of approximately 8.5 times the high-end of its 2025 guidance. Although its valuation has increased, it is still below pre-pandemic levels. Meanwhile, midstream MLPs traded at an average multiple of 13.7 times between 2011 and 2016.
Overall, Energy Transfer presents a compelling case to capitalize on the expanding opportunities in the midstream space brought about by the upsurge in natural gas demand from AI and data centers, while trading at historically attractive valuations. This positioning further strengthens the case for appreciating share prices and a robust distribution going forward.
- Energy Transfer plans to invest around $5 billion in capital expenditures for expansion projects in 2025, primarily focusing on the Permian Basin for pipeline expansions and enhancements.
- The company has entered into a cooperation agreement with CloudBurst Data Centers to provide natural gas for their AI-focused data center projects in central Texas, potentially boosting its revenue streams in the tech sector.
- To leverage this growth, Energy Transfer aims to generate mid-teen returns on its projects, which could add around $750 million in incremental EBITDA once fully operational.
- With its strong financial position, favorable market views on natural gas demand growth, and conservative EBITDA guidance of around 5% for 2025, Energy Transfer appears well-positioned to grow its operations and boost shareholder value by 2025.
