The Energy Sector Is on Fire. Is Energy Transfer the Best Way to Play It?
Key Points
Energy Transfer generates primarily fee-based earnings.
The MLP's business model insulates it from lower energy prices, while limiting its upside to higher prices.
Gas infrastructure is its main growth driver.
- 10 stocks we like better than Energy Transfer ›
The energy sector is off to a hot start in 2026. The average energy stock in the S&P 500 rallied more than 30% this year, vastly outpacing the index's 3% decline. The main driver is the epic surge in crude prices, which have roughly doubled already this year due to the war with Iran.
Here's a look at whether Energy Transfer (NYSE: ET) is the best way to play the rally in energy stocks.
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A stable business model
Units of Energy Transfer have surged more than 16% this year. That has trailed most energy stocks as well as the surge in crude oil prices. This underperformance is due to the master limited partnership's (MLP) business model.
Energy Transfer is a midstream energy company that owns pipelines, processing plants, export terminals, and other energy infrastructure assets. Most of these assets operate under long-term, fixed-rate contracts or government-regulated rate structures. Overall, Energy Transfer expects to get about 90% of its earnings from fees this year. Meanwhile, only about 5% to 10% of its earnings have exposure to commodity prices.
The company's business model protects its earnings from commodity price volatility. That benefits the MLP when energy prices fall, as it produces very stable cash flow. The stability of its cash flows enables Energy Transfer to pay a high-yielding distribution (currently 7%) that steadily increases (a 3% to 5% per year target). However, it limits the company's earnings upside potential when prices surge.
Gas-powered growth
Energy Transfer has very diversified operations as its assets handle crude oil, natural gas, natural gas liquids (NGLs), and refined products. However, natural gas is its main growth driver. Most of its large growth capital projects are either natural gas pipelines, gas processing plants, or NGL infrastructure. Less than 10% of its over $5 billion in capital spending will be on crude oil infrastructure projects this year.
The MLP has been capitalizing on the surge in gas demand to support rising electricity needs from AI data centers, advanced manufacturing facilities, and electric vehicles. Energy Transfer has secured several deals to supply gas directly to data centers, and it's working on additional agreements. It's also connecting new gas-fired power plants to its extensive gas infrastructure. The MLP currently has gas infrastructure projects under construction that should enter service through 2030, providing significant visibility into its future growth. These projects support its ability to grow its high-yielding distribution.
Energy Transfer provides stability during times of volatility
Energy Transfer primarily generates fee-based income as volumes flow through its midstream network. That business model insulates its earnings from lower prices. It also limits its upside to higher prices. As a result, Energy Transfer isn't the best energy stock to buy to cash in on the surge in crude prices. It's better for investors seeking an energy investment that can generate steady income and growth, regardless of where oil prices go.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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