Where Will Energy Transfer Stock Be in 1 Year?

Energy Transfer (NYSE: ET), one of the leading midstream companies in America, hasn't been an exciting investment over the past 12 months. Its stock rose less than 3% as the S&P 500 advanced nearly 15%. With reinvested distributions, it delivered a total return of 10%.

However, most people usually invest in Energy Transfer to generate stable income instead of market-beating gains. That stability might make it a safe stock to own if the S&P 500 -- which looks historically expensive at 31 times earnings -- pulls back. Let's review its growth rates and valuations to see where its stock might be headed in a year.

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Understanding Energy Transfer's business model

Energy Transfer operates than 140,000 miles of pipeline across 44 states. It provides delivery, storage, and terminalizing services for natural gas, liquefied natural gas (LNG), natural gas liquids (NGLs), crude oil, and refined products. It also exports those resources overseas.

As a midstream company, Energy Transfer charges upstream extraction companies and downstream refining companies "tolls" to use its pipelines. Since it only needs those resources to keep flowing through its pipes to generate stable revenue and profits, it's usually well insulated from volatile commodity prices. But it isn't immune to tariffs, which can increase its material, labor, and construction costs. It also isn't shielded from interest rate swings, which drive up its interest expenses and make it more expensive to expand its pipelines. Higher rates can also make its distributions less appealing to income-oriented investors than risk-free CDs and T-bills.

Energy Transfer structures its business as a master limited partnership (MLP) that blends the tax advantages of a private partnership with the liquidity of a publicly traded stock. MLPs mix a return of capital (which isn't taxed at the capital gains rate unless the underlying position is sold) with its taxable ordinary income to fund its distributions. It currently pays a high forward yield of 7.8% -- which is much higher than the 10-year Treasury's yield of 4%.

How healthy are Energy Transfer's distributions?

MLPs usually gauge their profitability through their adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings per public unit (EPU) instead of the standard earnings per share (EPS). Its annual distributions also need to be covered by its adjusted distributable cash flow (DCF) every year to stay sustainable.

Data source: Energy Transfer.

Energy Transfer's adjusted EBITDA and EPU declined sharply in 2020 as the pandemic forced many of its upstream and downstream customers to suspend their operations. But even throughout that crisis, its adjusted DCF comfortably covered its annual distributions.

Over the following four years, its adjusted EBITDA steadily increased, its EPU held steady, and its adjusted DCF continued to cover its distributions. It achieved that stable growth even as it expanded its pipelines by more than 50,000 miles in the past five years.

That rapid expansion was supported by its acquisitions of Enable Midstream Partners, Lotus Midstream, Crestwood Energy Partners, and WTG Midstream. It might make even more acquisitions over the next few years while organically expanding its core business with the completion of its Lake Charles LNG project in Louisiana (which is awaiting a final investment decision) and the expansion of its Permian Basin operations.

What will happen to Energy Transfer over the next year?

From 2024 to 2027, analysts expect Energy Transfer's adjusted EBITDA and EPU to grow at a compound annual growth rate (CAGR) of 4% and 7%, respectively. That stable outlook likely assumes interest rates will decline, the tariff-related headwinds will dissipate, and that its Lake Charles project will stay on schedule.

At $17 per share, Energy Transfer's stock still looks like a bargain at 7 times and 12 times this year's adjusted EBITDA and EPU, respectively. That low valuation and high yield should limit its downside potential even if the broader market swoons. I don't expect its shares to soar much higher over the next 12 months, but its stock price should hold steady as it consistently pays its big distributions. That makes it a great safe-haven play for income investors who aren't gunning for massive gains.

Leo Sun has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.