Time to Buy the Dip on Energy Transfer Stock?

Energy Transfer (ET -1.36%) has hit some turbulence in recent weeks. The master limited partnership’s (MLP’s) unit price has dipped more than 15% since peaking in early January. That followed a red-hot run that saw the MLP gain over 50% in a little more than a year.

That dip looks like a great buying opportunity for long-term investors, especially those seeking a lucrative passive income stream. It has helped push the MLP’s distribution yield up to around 7.3%, which is significantly higher than the S&P 500‘s 1.3% yield.

A great value proposition

Energy Transfer’s rally over the past year helped boost its valuation while driving down its distribution yield. However, despite that surge, the MLP still trades at a bottom-of-the-barrel valuation compared to its peer group:

As the chart in the upper left hand corner showcases, Energy Transfer currently has the second lowest valuation compared to its large midstream peers. That’s despite delivering steady growth, including reporting a strong 13% increase in its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) last year. Meanwhile, the MLP has a solid investment-grade balance sheet backed by a leverage ratio in the lower half of its target range.

The company’s growing earnings support its rising distribution. Energy Transfer continues to target 3% to 5% annual growth in its high-yielding payout. Its increasing earnings and strong financial profile can easily support that growth rate. Last year, Energy Transfer produced $8.4 billion of distributable cash flow. That covered its cash distribution to investors (about $4.4 billion) with $4 billion to spare. The company used the excess free cash flow to fund expansion projects ($3 billion) and maintain a strong balance sheet following a series of highly accretive acquisitions in recent years.

Not running out of fuel

Energy Transfer trades at a level that suggests its growth engine is running low on fuel. However, that couldn’t be further from the truth. The company has secured several new expansion projects in recent weeks, including the Hugh Brinson Pipeline. As a result, it expects to ramp up its capital-spending budget to about $5 billion this year.

The bulk of its current slate of capital projects should come online next year. Because of that, they’ll drive accelerated earnings growth in 2026 and 2027.

These projects are only the beginning. The MLP is capitalizing on three major growth catalysts: Permian Basin volume growth, natural gas power demand, and global demand for U.S. natural gas liquids (NGLs). Several factors are fueling a surge in U.S. natural gas power demand, including the onshoring of manufacturing, the electrification of everything, and AI data centers. The company is in an excellent position to cash in on the coming power boom due to its extensive natural gas infrastructure network. The MLP is receiving calls to supply gas to dozens of new power plants and prospective data centers throughout the country.

Energy Transfer has several projects under development to support growing gas production and demand. For example, it’s getting closer to approving its Lake Charles LNG export facility that would liquify and export natural gas produced from places like the Permian. Meanwhile, it recently signed the first of what could be many contracts to supply gas directly to a new data center.

Securing these and other projects would further enhance and extend Energy Transfer’s long-term growth outlook. It would give the MLP even more fuel to continue increasing its high-yielding payout.

An attractive time to buy

Energy Transfer’s current valuation doesn’t come close to reflecting its long-term growth prospects. Because of that, the recent dip in its unit price looks like a great buying opportunity, especially for those who would like to lock in an even more lucrative income stream. While buying the MLP does add some tax complexities (it sends investors a Schedule K-1 federal tax form each year), that can be well worth its combination of income and upside potential.