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

Energy Transfer LP (ET) units have outperformed its industry, rising 12.2% in the past nine months, driven by long-term, fee-based contracts and increasing demand from utilities and data centers. The company benefits from its extensive pipeline network and leading position in NGL exports, with expansions underway at key terminals. However, new U.S. licensing rules for ethane exports to China, which accounts for approximately 50% of U.S. ethane exports, introduce uncertainty regarding future revenues and operations.

Analysis

Energy Transfer LP (ET) has demonstrated strong market outperformance, with its units rallying 12.2% over the past nine months, significantly exceeding the industry's 4.8% growth, and currently trades above its 50-day and 200-day simple moving averages, indicating bullish technical momentum. The company's financial stability is largely supported by its revenue model, where approximately 90% is derived from long-term, fee-based contracts, minimizing commodity price volatility, and further bolstered by increasing demand for natural gas from electric utilities transitioning from coal and connection requests from nearly 200 data centers. ET's vast infrastructure, encompassing over 130,000 miles of pipeline and a significant 20% share of the global NGL export market, positions it advantageously to benefit from rising U.S. oil and gas production, with ongoing expansions at its Marcus Hook and Nederland terminals expected to enhance export capabilities. A notable headwind, however, is the introduction of new U.S. Commerce Department licensing requirements effective May 2025, which could disrupt ethane exports to China—a market representing about 50% of U.S. ethane exports—potentially affecting revenues tied to its Mont Belvieu and Nederland terminals. Despite this regulatory uncertainty, Zacks Consensus Estimates for ET's 2025 and 2026 earnings per unit have seen upward revisions of 2.13% and 4.26%, respectively, in the past 60 days, and the units trade at an Enterprise Value/EBITDA multiple of 10.37X, below the industry average of 11.85X, suggesting a relative undervaluation. While ET has a strong record of increasing distributions, with 14 raises in the past five years and a current payout ratio of 98%, its trailing 12-month return on equity of 11.47% is lower than the industry average of 13.95%.

Key Decisions for Investors

• Investors should closely monitor the impact of the new U.S. export licensing rules on Energy Transfer's ethane shipments to China, as this presents a material risk to future revenues and operational stability.
• Considering the stock's current Zacks Rank #3 (Hold), recent price appreciation, and the identified export uncertainties, prospective investors might await further clarity or a more favorable entry point, while existing holders could maintain their positions, benefiting from the consistent distributions.
• The attractive valuation indicated by an EV/EBITDA multiple below the industry average and a strong distribution yield should be weighed against the company's lower return on equity compared to industry peers and the looming regulatory headwinds.