Is now the time to buy energy transfer stocks?

Energy transfer (ET -1.70%) raised its full-year guidance once again when it reported its second-quarter results, showing the company’s strong operating momentum. The stock has performed well this year, returning more than 20%, including distributions.

Despite its strong performance this year, the master limited partnership (MLP) still has an attractive forward distribution yield of about 7.9% and trades at an attractive valuation.

Let’s dive into the company’s Q2 results and guidance and see why the stock is an attractive option for income-oriented investors.

The momentum continues

The pipeline company continued to post strong volume growth across its segments, led by a 22% increase in crude oil transportation volumes. Meanwhile, terminal crude and NGL fractionation volumes both increased by 11%, and refined product volumes increased by 9%.

This led to a nearly 21% increase in Adjusted EBITDA in the quarter to $3.8 billion. Distributable cash flow (DCF) to partners, which is the amount of cash the company generates before capex, was $2 billion, up nearly 32% year over year follow. The company increased its distribution per share by 3.2% year over year to $0.32.

The company paid out $1.2 billion in distributions to unitholders in the quarter. This equates to a distribution coverage ratio of nearly 1.7x on a DCF basis. After paying distributions, Energy Transfer had about $800 million in excess cash flow and spent $549 million on growth investments in the quarter. As such, its distribution remains well covered.

Looking ahead, Energy Transfer raised its full-year EBITDA guidance to a range of $15.3 billion to $15.5 billion, from a previous estimate of $15 billion to $15.3 billion.

The new guidance reflects the acquisition of WTG Midstream and the performance of its core business. It notes that the forecast includes $100 million in transaction costs associated with the deal. It also raised its investment growth guidance to between $3 billion and $3.1 billion, from a previous range of $2.8 billion to $3 billion.

Energy Transfer’s updated outlook continues to point to solid growth and continued distribution coverage. The adjusted EBITDA forecast implies a full-year DCF of approximately $9 billion, while it will spend approximately $3.1 billion in growth capital expenditures. It has paid out $2.3 billion in distributions so far this year and should pay a total of about $4.7 billion for the year. That would give it about $1.2 billion in cash to pay down debt.

A stock with an attractive value

Energy Transfer trades at an attractive forward enterprise value (EV)-EBITDA multiple of just 7.3x. That’s a much lower valuation than its MLP peers, as well as below the valuation the company traded at before the pandemic. (NYSE: ENLC) (NYSE: WES) (NYSE: EPD) (NYSE: MPLX) ((NYSE: MCO)

ET EV to EBITDA data (before) by YCharts

ET EV to EBITDA data by YCharts

Meanwhile, the midstream industry as a whole trades at a nice discount compared to the 13.7x EV/EBITDA multiple that stocks averaged between 2011 and 2016.

At the same time, Energy Transfer’s balance sheet is in strong shape, as evidenced by the recent senior unsecured debt upgrade it received from Moody’sand its distribution reach remains robust. The company is also well-positioned to benefit from increased demand for natural gas, which is starting to emerge due to higher demand for energy due to the development of artificial intelligence (AI) infrastructure. The company said it serves 185 gas-fired power plants in 15 states and recently signed agreements across its system to supply more than 500,000 MMBtus per day. It is also in discussions with data centers looking to add on-site generation capacity.

The combination of growth stemming from increased demand for natural gas and potential multiple expansion (when stock valuations rise) makes Energy Transfer one of the most interesting energy stocks. Investors receive a return of almost 8%. As such, this looks like an excellent time to buy the stock at current levels.