Energy Transfer Stock Will Nearly Double in 5 Years

Most investors are interested in: energy transfer (NYSE: ET) They are attracted to its height. fruitwhich is currently around 7.9%. The company currently pays a quarterly dividend of $0.32 and is looking to grow that by 3% to 5% annually going forward.

That’s attractive in itself, but I also think the pipeline operator’s shares could nearly double over the next five years.

This can happen through a combination of growth projects, as well as modest multiple expansion, which is when investors assign a higher valuation metric to a stock.

Let’s take a look at why I believe Energy Transfer stock could more than double in the next five years.

Growth opportunities

Energy Transfer is one of the largest transportation companies in the United States, with a comprehensive, integrated system spanning the country. It is involved in nearly every aspect of the transportation sector, moving, storing, and processing various hydrocarbons across its systems. The size and scope of its systems gives it many opportunities for expansion projects.

The company plans to spend between $3 billion and $3.2 billion on growth this year. Capital expenditure In the future, spending $2.5 billion to $3.5 billion in growth capital annually would allow the company to pay its dividend while preserving the remaining cash flow to pay down debt and/or repurchase shares.

Given this, and the early opportunities Energy Transfer sees in power generation due to increased data center energy needs driven by the rise of AI, it’s probably safe to say the company could spend about $3 billion in growth capital annually over the next five years.

Most mid-industry companies look for a construction multiple of at least 8x on new projects. This means that the projects will pay for themselves in about eight years. For example, a $100 million project with an 8x multiple would generate an average of $12.5 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) per year.

Based on this type of return on growth projects, Energy Transfer should be able to see its adjusted EBITDA rise from $15.5 billion in 2024 to about $17.4 billion in 2029 if it continues to spend $3 billion annually on growth projects.

Multiple expansion opportunities

From a valuation perspective, Energy Transfer is the cheapest stock among its master limited partnership (MLP) peers, trading at 8x future enterprise value to adjusted EBITDA. This metric takes into account a company’s net debt excluding non-cash items and is the most widely used method for valuing midstream companies. At the same time, it is trading at a much lower valuation than it has historically.

The story continues

The average P/E of mid-cap MLP stocks was 13.7x between 2011 and 2016, so the industry as a whole has seen its multiple decline. However, with demand for natural gas rising due to AI and demand for electric vehicles declining, it looks like the transition to renewables could take much longer than expected. If so, these stocks should be able to achieve a higher multiple than they currently are, easing concerns that demand for hydrocarbons will start to decline significantly in the coming years.

How Energy Transfer Shares Nearly Doubled

If Energy Transfer grows its EBITDA as expected, the stock could reach $30 in 2029 if it can achieve a 10x EV/EBITDA multiple. That’s higher than its current forward multiple of 8x and trailing multiple of 8.7x, but still well below where the MLP has traded in the past.

*Company value is based on 3.42 billion shares outstanding, $57.6 billion in debt, $3.9 billion in preferred stock, $3.9 billion in investments in unconsolidated subsidiaries and cash, and $11.6 billion in minority interest.

However, Energy Transfer and several other midstream companies appear to be very well positioned to win AI due to the growing demand for natural gas power. Energy companies and data centers have already begun approaching Energy Transfer about natural gas transmission projects, and there could be a surge in natural gas volumes. Given this growth opportunity, combined with the company’s strengthening balance sheet and continued distribution growth, I can see Energy Transfer’s multiple expanding modestly over the next five years and the stock nearly doubling.

But even if its multiple doesn’t expand, investors can still get a very strong return on their investment through a combination of dividends (currently $0.32 per unit per quarter) and more modest price appreciation. Absent a multiple expansion and more than $7 in dividends between now and the end of 2029 (assuming a 4% annual increase), the stock would still generate a return of more than 75% over that period.

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Jeffrey Seller The Motley Fool has positions in Energy Transfer, Enterprise Products Partners, and Western Midstream Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool owns Disclosure Policy.

Prediction: Energy Transfer stock will nearly double in 5 years Originally posted by The Motley Fool