ET Stock Outperforms its Industry in Nine Months: How to Play?

Energy Transfer LP (ET) units have outperformed its industry, driven by fee-based contracts and expansion to meet rising power demand, including supplying natural gas to new power plants and data centers. The company's strategic asset positioning and diversified portfolio support stable earnings, with expansions boosting NGL and crude oil export capacity. However, new U.S. licensing requirements for exports to China introduce uncertainty, potentially impacting shipment volumes and revenues, particularly from its Mont Belvieu and Nederland terminals.

Analysis

Energy Transfer LP (ET) units have demonstrated notable strength, rallying 12.2% over the past nine months, outperforming the Zacks Oil and Gas - Production Pipeline - MLB industry's 4.8% growth and its broader sector. This performance is supported by its stock trading above both its 50-day and 200-day simple moving averages, indicating a bullish technical trend. Fundamentally, approximately 90% of ET's revenues are derived from fee-based contracts, providing stable cash flow insulated from commodity price volatility. The company is strategically expanding to capitalize on rising power demand from new load centers, including securing agreements to supply natural gas for new gas-fired power plants and responding to connection requests from nearly 200 data centers. ET's extensive 130,000-mile pipeline network across 44 states, coupled with significant NGL and crude oil export capabilities (over 1.1 million bpd of NGLs and 1.9 million bpd of crude oil), positions it well. Expansions at its Marcus Hook and Nederland terminals are set to further enhance these capacities, solidifying its estimated 20% share of the global NGL export market. Despite these strengths, a significant headwind emerges from new U.S. Commerce Department licensing rules effective May 2025, which introduce uncertainty for ethane shipments to China, a market accounting for nearly 50% of U.S. ethane exports. This could impact ET's Mont Belvieu and Nederland export terminal operations. On a positive note, Zacks Consensus Estimates for ET's 2025 and 2026 earnings per unit have increased by 2.13% and 4.26% respectively in the past 60 days, contrasting with declining estimates for competitor ONEOK Inc. (OKE). ET has consistently raised distributions, with 14 increases in the past five years and a current payout ratio of 98%. Valuation-wise, ET's trailing 12-month EV/EBITDA of 10.37X is below the industry average of 11.85X, suggesting it is undervalued. However, its trailing 12-month ROE of 11.47% is lower than the industry average of 13.95%. The article assigns ET a Zacks Rank #3 (Hold), acknowledging its strong operational base and positive earnings estimate revisions but also highlighting near-term risks from export licensing and a comparatively lower ROE.

Key Decisions for Investors

• Investors should acknowledge Energy Transfer's strong recent performance and robust fee-based revenue model, but carefully weigh the potential impact of new U.S. export licensing rules for China on future NGL and ethane shipment volumes and associated revenues.
• Consider the stock's current undervaluation based on EV/EBITDA relative to its industry, alongside its consistent distribution growth, against the backdrop of a lower-than-industry ROE and the Zacks Rank #3 (Hold) suggesting a cautious approach.
• Monitor developments related to the U.S. Commerce Department's licensing decisions for ethane exports and ET's ability to mitigate potential disruptions to its China-bound shipments, as this is a key near-term risk factor.
• Given the mixed signals of positive earnings estimate revisions and growth initiatives versus regulatory headwinds and a lower ROE, new investors might consider waiting for further clarity on the export license situation or a more favorable entry point, as suggested by the article's concluding remarks.