Prediction: These 2 Stocks Will Thrive Under Trump's Energy Plan

Under President Donald Trump, there has been a big shift in energy policy in the U.S. Instead of incentivizing green energy technologies such as solar and wind, the current administration is focused on increasing American energy production and infrastructure.

The administration is particularly focused on natural gas, with Energy Secretary Chris Wright recently touting its importance at the annual CERAWeek conference. That's good news for companies involved in the pipeline space, as these are volume-driven businesses.

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Let's look at two stocks that should thrive under the current administration's energy plan.

Transition to growth mode

Energy Transfer (NYSE: ET) and Enterprise Products Partners (NYSE: EPD) operate two of the largest integrated midstream systems in the U.S., where they transport, store, and upgrade various hydrocarbons, such as crude, natural gas, NGLs (natural gas liquids), and refined products. Both companies have expansive systems that transverse a sizable portion of the country, but they both have particularly strong presences in the Permian Basin, Texas, and around the Gulf Coast.

Both of these companies also have largely fee-based, volume businesses, and they both like to include take-or-pay or volume commitments in their contracts when they can. Approximately 90% of Energy Transfer's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) comes from fee-based businesses, while Enterprise has said that about 80% of its cash flow is fee-based.

Energy Transfer also runs a large arbitrage business, where it is able to take hydrocarbons like natural gas to higher-priced regions, store them until more seasonally favorable times (natural gas prices tend to be higher in winter), or upgrade NGLs to a more valuable product when spreads are favorable.

The combination of a more favorable government energy policy and increasing energy needs stemming from artificial intelligence (AI) have led both Energy Transfer and Enterprise to transition into growth mode, given the attractive opportunities in the midstream space.

Energy Transfer is leading the way, announcing it will spend $5 billion on growth projects this year, which is a big increase from the $3 billion it spent last year. Much of this spending will be centered around the Permian Basin, anchored by its Hugh Brinson Pipeline, which will take natural gas away from the Permian and connect to Energy Transfer's intrastate natural gas pipeline network to help support rising demand from power companies and data centers in Texas.

Enterprise, meanwhile, plans to increase its growth capex this year to between $4 billion and $4.5 billion, excluding any acquisitions, up from $3.9 billion in 2024. Enterprise has a history of being prudent with its capital expenditures (capex), so it is notable that it plans to increase it nicely this year. Following the pandemic's height, it cut its growth capex back to $1.6 billion in 2022, so the tide has certainly shifted.

Both companies are also seeing increasing opportunities from the buildout of data centers related to AI. Energy Transfer signed its first AI-related agreement to bring natural gas to an AI data center being developed by CloudBurst in central Texas. Meanwhile, the company has touted getting inbound calls from 70 data centers in 12 states and 60 power plants it doesn't currently serve in 13 states for new natural gas connections.

Enterprise has said it has interest in 20 data center projects and 15 potential power plant projects. It noted that about 15% of the data center projects and half of the power plant opportunities were showing signs of progress.

Image source: Getty Images.

Attractive yields and growing distributions

In addition to their growing set of project opportunties, both Energy Transfer and Enterprise have attractive yields and growing distributions. Energy Transfer sported a 7.2% yield at Friday morning's prices and plans to grow its payouts by 3% to 5% moving forward. Enterprise has a 6.5% yield and raised its distribution by nearly 4% year over year last quarter.

Enterprise has proven to be a model of consistency, increasing its distribution for 26 straight years. Energy Transfer had to cut its distribution in half during COVID to shore up its balance sheet, but it managed to quickly achieve its goal, and its payout is now more than it was before the cut.

Both companies have well-covered distributions, with both Enterprise and Energy Transfer having similar 1.8 times distribution coverage ratios in the fourth quarter, based on their distributable cash flow (DCF). This gives the companies the cash they need to help fund their growth programs, while also being able to pay out their nice distributions.

Inexpensive stocks

Companies organized as master limited partnerships, like Enterprise and Energy Transfer, currently trade at historically attractive valuations, well below the average 13.7 times enterprise value-to-EBITDA (EV/EBITDA) multiple the group traded at between 2011 and 2016. EV/EBITDA is the most common way midstream companies are valued by the market, as it takes into consideration their net debt while taking out non-cash depreciation charges.

Enterprise currently trades at a forward EV/EBITDA multiple of just below 10 times, while Energy Transfer trades at just above 8 times. Enterprise has historically traded at a premium to the group, given its strong track record and consistency.

EPD EV to EBITDA (Forward) data by YCharts

Both stocks are attractively valued and should have strong growth opportunities in a more accommodative government energy environment.

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Geoffrey Seiler has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.