An Ultra-High-Yield Dividend Makes This My Favorite Midstream Stock for 2025

With 2024 coming to a close, investors are now turning their attention to 2025 and looking toward what stocks may help lead the way in the new year. Within the energy and midstream space, my favorite stock for 2025 is none other than Energy Transfer Partners (NYSE: ET). The stock has had a strong 2024 with a total return, including distributions, of about 50% as of this writing.

However, I think the master limited partnership's (MLP's) momentum can continue into 2025 and that it can be one of the best-performing stocks in the midstream space next year. It has an attractive 6.9% forward yield with a well-covered and growing distribution, but that's not why it's my favorite stock in the sector heading into 2025.

AI and other growth opportunity

One of the biggest themes of 2024 was artificial intelligence (AI), as both major tech companies and well-funded start-ups rushed to increase their data center infrastructure this year in order to train large language models (LLMs) and run AI inference. Spending on these projects is only expected to increase in 2025.

With increased AI demand also comes the need for more power. Training AI models and running inference is very energy intensive, and as AI models become more sophisticated, their computing power and energy needs only grow. Goldman Sachs has estimated that global data center power demand will surge 160% by 2030. Meanwhile, it sees data centers becoming 8% of U.S. power by 2030 versus only 3% back in 2022. While U.S. electricity usage has been flat for the past decade, moving forward it sees electricity usage climbing at a 2.4% compound annual growth rate through 2030.

So, what does that have to do with Energy Transfer? Natural gas is expected to play a major role in helping meet the power needs of AI, and Energy Transfer is one of the country's leading natural gas pipeline transporters. Goldman sees natural gas demand increasing by around 3.3 billion cubic feet per day by 2030, which will also spur the need for new pipelines. Tech companies are also turning to nuclear power, but natural gas plants can be built much more quickly and face fewer permitting and regulatory obstacles.

Energy Transfer, meanwhile, is one of the best-positioned midstream companies to take advantage of the growing demand for natural gas. It has a large, integrated midstream system that also has access to areas with some of the cheapest natural gas, including the associated natural gas that comes out of the Permian. Earlier this month, the company announced a new $2.7 billion project to bring natural gas out of the basin to other markets that, among other things, will help support power plant and data center growth in Texas. The project is backed by long-term, fee-based contracts and is expected to be in service by the end of 2026.

On its last earnings call, the company said that it is also seeing increased power demands from AI and data centers across several of its pipelines. It also noted that it has gotten requests to connect to approximately 45 power plants that it does not currently serve in 11 states that could consume 6 BCF a day of natural gas. It has also received requests from more than 40 prospective data centers in 10 states that could use 10 BCF a day of natural gas.

Even before the announcement of its recent Permian pipeline project, Energy Transfer had one of the most robust project pipelines in the midstream space. Management has budgeted between $2.8 billion to $3 billion on growth projects this year. In the past, it has talked about a $2 billion to $3 billion growth capital expenditure (capex) run rate, but it recently boosted that to between $2.5 billion and $3.5 billion, given the opportunities it is seeing.

These growth opportunities should lead to continued earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flow growth, which should also help lead to increased distributions in the coming years.

Image source: Getty Images.

Attractive valuation

Besides having some of the best growth opportunities in the pipeline space, Energy Transfer is also one of the most attractively valued MLPs. Enterprise value (EV) to EBITDA is typically the preferred metric investors use when valuing midstream companies. The reason is that midstream companies invest a lot of money upfront (capex) on new projects, and then those expenses are depreciated over the useful life of the assets. By using EV/EBITDA, the project costs are captured in its debt net, while EBITDA is more indicative of the company's current operating profitability.

Based on this metric, the stock currently trades at an attractive EV/EBITDA multiple of just 8.6 times, which is one of the lowest valuations among its MLP peers.

ET EV to EBITDA (Forward) data by YCharts.

Meanwhile, MLPs as a group are trading well below the levels they traded at between 2011 and 2016 when they had an average EV/EBITDA multiple of 13.7 times.

With Energy Transfer having one of the most attractive valuations in the MLP space, along with some of the best growth opportunities, it is my favorite midstream MLP heading into 2025.

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Geoffrey Seiler has positions in Energy Transfer, Enterprise Products Partners, and Western Midstream Partners. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.