Most investors interested in Energy Transfer (NYSE: ET) are attracted to its high yield, which currently sits around 7.9%. The company currently pays a $0.32 quarterly distribution and is looking to increase that by between 3% to 5% a year moving forward.
That is attractive in and of itself, but I also think the pipeline operator’s stock could nearly double over the next five years.
This would 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 look at why I think Energy Transfer’s stock can more than double in the next five years.
Growth opportunities
Energy Transfer is one of the largest midstream companies in the U.S., with an expansive integrated system that traverses the country. It’s involved in nearly all aspects of the midstream sector, transporting, storing, and processing various hydrocarbons across its systems. The size and breadth of its systems give it many expansion project opportunities.
This year, the company plans to spend between $3 billion to $3.2 billion in growth capital expenditures (capex) on new projects. Moving forward, spending between $2.5 billion to $3.5 billion in growth capex a year would allow it to pay its distribution while having money left over from its cash flow to pay down debt and/or buy back stock.
Given this, and the early opportunities that Energy Transfer is seeing in power generation due to increased power needs from data centers stemming from the rise in artificial intelligence (AI), it’s probably safe to say that the company could spend about $3 billion in growth capex a year over the next five years.
Most companies in the midstream space are looking for at least 8x build multiples on new projects. This means that the projects would pay for themselves in about eight years. For example, a $100 million project with an 8x multiple would generate an average return of $12.5 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) a year.
Based on that type of return on growth projects, Energy…
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