This unique energy stock is a dual threat, offering both income and growth
I like investments that can work in more than one way. Energy Transfer LP is one of those stocks. I see it as a short-term tactical opportunity, but also a long-term compounder that gives me both growth and income. It’s a barbell trade wrapped up in one stock. The Dallas-based energy infrastructure company operates roughly 140,000 miles of pipelines and related assets across 44 states. Its network stretches into some of the most important energy-producing regions in the country, including the Permian Basin, Eagle Ford and Utica. Key points Midstream energy infrastructure remains cheap despite stronger oil and natural gas prices. A recent pullback creates a near-term buying opportunity in a company I also see as a long-term compounder. Energy Transfer offers both income and growth. There are several forces working in Energy Transfer’s favor right now. U.S. power demand is rising, natural gas infrastructure remains critical to meeting growing power needs, and data centers and AI are adding another source of electricity demand. Why I’m buying The sector looks cheap relative to the opportunity U.S. power demand is rising, particularly as data centers and AI infrastructure require enormous amounts of electricity. That is creating additional demand for natural gas and the pipelines needed to move it. Energy Transfer is also continuing to expand its footprint. The company announced Tuesday that it is acquiring Vaquero Midstream for $2.63 billion, adding natural gas and natural gas liquids infrastructure in the Permian Basin. The pullback gives me a chance to buy Energy Transfer has pulled back from its recent highs, creating what I see as an attractive entry point. But I’m not simply betting on the stock bouncing back. ET YTD mountain Energy Transfer LP, YTD The company has a backlog of natural gas liquids projects that I believe can help drive top-line growth at a more than 10% compounded annual rate over the next five years. That gives me a longer-term growth story underneath the shorter-term trade. I can take advantage of weakness in the stock today while owning a business that I think can continue compounding over time. I get income and growth Energy Transfer is a bit like a toll company for energy. It moves oil and natural gas through its pipelines and collects fees for providing that infrastructure. That steady cash flow helps support a roughly 7% distribution yield, giving me income while I own the stock. At the same time, rising demand for natural gas and new infrastructure projects give the business opportunities to grow. But there is a risk. When interest rates rise, Energy Transfer has to compete harder for income-seeking investors. If investors can earn 4% or 5% from a relatively low-risk 10-year Treasury, a roughly 7% yield from a stock that carries more risk can become less attractive. That’s something I’m watching, but for now I still like the combination of income and growth. Why now? The stock has recovered some of its recent losses, but I still see an opportunity. Energy Transfer trades at about 11.2 times EV/EBITDA, and I think the sector deserves a higher valuation as demand for U.S. energy infrastructure grows. At the same time, I’m collecting a roughly 7% yield while I wait. That combination of income and growth is what makes the stock attractive to me here. Bottom line Energy Transfer gives me both income and growth in a sector benefiting from powerful tailwinds. It may be a boring business, but that’s what I like about it: the potential for total return without needing a flashy story. Tim Seymour is the founder and CIO of Seymour Asset Management. He has over 28 years of investment experience as a hedge fund and portfolio manager, allocator and capital markets professional across multiple asset classes. Disclosures: Seymour owns personally. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. This content is provided as part of our editorial output for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to buy any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above content might not be suitable for your particular circumstances. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. 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