Energy Transfer

Energy Transfer delivered a 13% adjusted EBITDA surprise over PitchBook consensus, or $5.1 billion vs $4.5 billion. The NGL and Midstream segments delivered 27% and 15% year-over-year EBITDA growth. EBITDA guidance increased to $18.95 billion at the midpoint from $18.4 billion.

Why it matters: The conflict has benefited Energy Transfer due to its diverse services and commodity-exposed businesses. Management sees stronger financial performance through all segments as volumes are up across the footprint, with momentum anticipated to continue through the year. In barely a year, the market has gone from worried about NGL overcapacity to firms greenlighting new projects for the end of the decade. Energy Transfer greenlighting a fully subscribed $1 billion ethane and LPG expansion at Nederland underscores the shift. It is likely that the natural gas segments will have additional new investment in the coming months, as management cited active discussions with new power consumers in its core footprint. These will likely be smaller laterals rather than large projects such as Desert Southwest.

The bottom line: We are maintaining our $24 fair value after refreshing our model for the most recent results. We still view the firm's diverse footprint offering multiple avenues for productive investment. We still see Energy Transfer as a top pick in our midstream coverage, with units trading in four-star territory. Our no-moat, Poor Capital Allocation, and Medium Uncertainty ratings remain unchanged.

We are maintaining our $24 fair value estimate per share after incorporating the most recent results and the recently announced Nederland expansion.

We expect adjusted EBITDA of $18.9 billion for 2026 and $18.5 billion for 2027. This is in line with management’s revised guidance for 2026. Higher commodity prices have led to higher volumes and spreads, affecting volume-sensitive and market-price-exposed activities. New projects entering service, namely the Hugh Brinson pipeline and expansions in the NGL segment, will drive growth over the next couple of years.

Further investment in natural gas pipelines looks likely, as demand from LNG on the Gulf Coast and population centers like Phoenix will support expanded pipeline capacity. The Desert Southwest pipeline may provide an additional $1 billion in incremental EBITDA when online.

Energy Transfer’s core activities of natural gas transmission are generally steady, deriving the majority of profit from take-or-pay capacity reservation fees. However, the business also takes on commodity price risk through the buying and selling of natural gas. Other segments take on direct price risk as well, while other areas are exposed to volume risk.

Energy Transfer does not have a moat, in our view. The partnership has diversified its business lines and expanded services across the value chain. As oil production has moved from growth to maturity, the flexibility to pivot to investment in its extensive natural gas asset base is evident. However, we do not observe a history of excess returns. In addition, the partnership prefers to assume commodity risk. In good years, this can lead to substantial excess returns, but we cannot have certainty over a long enough horizon to ascribe a moat.

Intrastate and Interstate transportation and storage earn a narrow moat.

Intrastate lines primarily move natural gas within Texas. Returns for the segment have been attractive as fees charged are set by the market rather than regulators, and active marketing of natural gas, making continued investment likely. Energy Transfer has been able to competitively invest in new projects to move gas from the Permian and midcontinent to the Gulf Coast and population centers.

That said, the segment is also heavily involved in the marketing and sale of natural gas, which introduces commodity price risk. We view this as a negative from a moat perspective as there can be no certainty in the returns over a long enough horizon. We expect Energy Transfer to continue developing intrastate assets as both demand and production continue to grow. New LNG facilities on the Gulf Coast demand Permian gas, which will be delivered through a combination of intrastate and interstate pipelines.

Interstate transportation moves gas between states under federal regulation. Unlike the intrastate operation, fees are cost of service, preventing the pipeline operator from fully flexing its market power while providing greater certainty. Intrastate assets are difficult to displace once established, as the incumbent can grow most efficiently.

Midstream earns no moat.

Midstream encompasses field-level natural gas gathering and processing. It has many competitors, low barriers to entry, weak contractual protection, and demands constant investment. For these reasons, we generally do not assign a moat to these operations and see no reason to make an exception here.

NGL and refined products earns a narrow moat.

NGL fractionation and transportation earns a narrow moat. NGL transport pipelines connect the field-level processing facilities to fractionation capacity at market hubs. The value is moving and fractionating raw feed into its constituent chemicals, then connecting the molecules to the most lucrative or most potential demand locations, allowing the pipeline operator to secure the best price for the shipper’s molecule. Here, Energy Transfer has plenty of ability to drive molecules south to Gulf Coast fractionation and its own export docks. Export capacity is critical in competing, as the global market provides the best price for NGLs.

The segment is receiving substantial growth capital tied to the expansion of export capacity at its docks with new fractionation capacity. US NGLs have become critical feedstocks to global chemical producers. Production growth has meant the US provides some of the lowest-cost feedstock on the market. Growth investment will fall after the completion of the current projects to allow existing capacity to fill. A maintenance capital plan allows returns to accelerate upward as producers push into gassier acreage while existing production throws off more gas.

Crude oil transportation and services earn no moat.

Crude oil managed returns above Energy Transfer’s cost of capital before covid and may again be able to do so consistently. Rates per barrel for the segment have been volatile, along with operating profit per barrel. Seeing consistent returns above the cost of capital in our forecast depends on minimal new investment and stabilization of rates. Investment in new pipelines is unlikely, with the focus being on field-level gathering operations. As with natural gas gathering and processing, we view the crude equivalent as not moaty.

Sunoco earns a narrow moat.

Sunoco, in addition to a substantial retail distribution footprint, has a network of refined product and crude pipelines along with distribution terminals. Energy Transfer holds 21% of outstanding common units and 100% of general partner incentive distribution rights that grant it 50% of all distribution growth, having hit the final breakpoint. The segment has consistently produced returns above its cost of capital, and we expect it to continue to do so.

USA Compression earns no moat.

USAC is a provider of compression services to field-level gathering assets and enhanced recovery operations at the wellhead. Gatherers and producers enter into fixed-rate take-or-pay service agreements that can last from six months to five years. The recent performance has been driven by high utilization of its compression fleet as operators have sought to squeeze the most out of existing infrastructure.

Energy Transfer has a large and diverse footprint that enables it to pivot its investment and focus to areas of growth.

New data centers in Texas will benefit Energy Transfer’s intrastate assets, which are well positioned to benefit from rising natural gas demand, delivering to LNG facilities along the Gulf Coast.

The firm is one of three major NGL exporters, allowing it to win volumes through access to international markets.

Its acquisitive nature leaves it vulnerable to overpaying for new assets.

It has historically been a target of environmental and legal challenges, with its breadth of operations offering many potential targets.

Yield-focused investors may pass on Energy Transfer in a higher-rate environment as debt could offer better returns.