As 2024 draws to a close, investors are now turning their attention to 2025 and looking at which stocks can lead the way in the new year. In energy and midstream, my favorite stock for 2025 is none other than Energy transfer partners (NYSE:ET). The stock has had a strong 2024 with a total return, including distributions, of around 50% at the time of writing.
However, I think Master Limited Partnership (MLP)’s momentum can continue into 2025 and it could be one of the best performing stocks in the midstream sector next year. It has an attractive forward yield of 6.9% with a well-covered and growing distribution, but that’s not why it’s my favorite stock in the sector heading into 2025.
One of the biggest themes of 2024 was artificial intelligence (AI), as both major tech companies and well-funded startups rushed to use their data center infrastructure this year to train large language models (LLMs) and perform AI inference. It is expected that expenditure on these projects will only increase in 2025.
With the increased demand for AI also comes the need for more power. Training AI models and performing inferences is very energy intensive, and as AI models become more sophisticated, their computing power and energy needs only increase. Goldman Sachs estimates that global energy demand in data centers will increase by 160% by 2030. Meanwhile, it expects data centers to account for 8% of U.S. energy by 2030, up from just 3% in 2022. Although U.S. electricity consumption has remained stable over the past decade, going forward, electricity consumption will increase at a compound annual rate through 2030 growth rate of 2.4%.
What does that have to do with energy transfer? Natural gas is expected to play an important role in meeting AI’s energy needs, and Energy Transfer is one of the leading natural gas pipeline carriers in the country. Goldman expects natural gas demand to increase by about 3.3 billion cubic meters per day by 2030, which will also drive the need for new pipelines. Technology companies are also turning to nuclear power, but natural gas plants can be built much faster and face fewer permitting and regulatory hurdles.
Energy Transfer, meanwhile, is one of the best-positioned midstream companies to benefit from growing demand for natural gas. It has a large, integrated midstream system that also has access to areas with the cheapest natural gas, including associated natural gas coming from the Permian. Earlier this month, the company announced a new $2.7 billion project to bring natural gas from the basin to other markets, which will, among other things, help support the growth of power plants and data centers in Texas. The project is supported by long-term, fee-based contracts and is expected to be commissioned by the end of 2026.
On its latest earnings call, the company said it is also seeing increased demand for energy from AI and data centers in several of its pipelines. It also noted that it has received requests to connect to approximately 45 power plants that it does not currently serve in 11 states that could consume 6 BCF per day of natural gas. It has also received requests from more than 40 potential data centers in 10 states that could use 10 BCF per day of natural gas.
Even before the announcement of its recent Permian pipeline project, Energy Transfer had one of the most robust project pipelines in the midstream space. Management has budgeted between $2.8 billion and $3 billion in growth projects this year. In the past, the country has talked about a capital expenditure (capex) growth rate of $2 billion to $3 billion, but recently increased that to between $2.5 billion and $3.5 billion given the opportunities it sees.
These growth opportunities should lead to continued earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flow growth, which should also lead to higher payouts in the coming years.
In addition to having some of the best pipeline growth opportunities, Energy Transfer is also one of the most attractively valued MLPs. Enterprise value (EV) to EBITDA is typically the preferred metric used by investors when valuing midstream companies. The reason for this is that midstream companies invest a lot of money (capex) upfront in new projects, and these costs are then amortized over the useful life of the assets. Using EV/EBITDA, project costs are included in net debt, while EBITDA is more indicative of the company’s current operating profitability.
Based on this metric, the stock currently trades at an attractive EV/EBITDA multiple of just 8.6 times, which is one of the lowest valuations among its MLP peers.
ET EV to EBITDA (forward) data according to YCharts.
Meanwhile, MLPs as a group are trading well below the levels they traded at between 2011 and 2016, when they had an average EV/EBITDA multiple of 13.7 times.
Because Energy Transfer has one of the most attractive valuations in the MLP space, along with some of the best growth opportunities, it is my favorite midstream MLP heading into 2025.
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Geoffrey Seiler has positions in Energy Transfer, Enterprise Products Partners and Western Midstream Partners. The Motley Fool holds positions in and recommends Goldman Sachs Group. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
An ultra-high yield dividend makes this my favorite midstream stock for 2025 was originally published by The Motley Fool
