Is now the right time to buy Energy Transfer shares?

Energy transfer (ET -1.70%) When announcing second-quarter results, the company again raised its full-year guidance, demonstrating the company’s strong operating momentum. The stock has performed well this year, returning over 20% (including distributions).

Despite its strong performance this year, the Master Limited Partnership (MLP) still has an attractive distribution yield of around 7.9% and trades at an attractive valuation.

Let’s take a look at the company’s second-quarter results and guidance and examine why the stock is an attractive option for income-seeking investors.

The momentum continues

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

This led to an increase in adjusted EBITDA of nearly 21% to $3.8 billion in the quarter. Distributable cash flow (DCF) to partners, the amount of cash generated by the company before growth capital expenditures (capex), was $2 billion, up nearly 32% year-over-year. 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 shareholders during the quarter, representing a distribution coverage ratio of nearly 1.7 times on a DCF basis. After paying out distributions, Energy Transfer had excess cash flow of approximately $800 million and spent $549 million on growth investments during the quarter, so the distribution remains well covered.

Looking ahead, Energy Transfer has increased its full-year EBITDA guidance to $15.3 billion to $15.5 billion from $15 billion to $15.3 billion.

The new guidance reflects the acquisition of WTG Midstream and the outperformance of the base business. It notes that the guidance includes $100 million in transaction costs related to the transaction. In addition, the guidance for growth capital expenditures was increased from $2.8 billion to $3 billion to $3.1 billion.

Energy Transfer’s updated outlook points to continued solid growth and distribution coverage going forward. Adjusted EBITDA guidance implies full-year DCF of approximately $9 billion, while approximately $3.1 billion is expected to be spent on growth investments. Distributions of $2.3 billion have been paid so far this year, and full-year distributions of approximately $4.7 billion are expected, leaving the company with approximately $1.2 billion in cash available to pay down debt.

An attractively valued share

Energy Transfer trades at an attractive EV-EBITDA ratio of just 7.3x, a much lower valuation than its MLP peers and also below the valuation at which the company traded before the pandemic. (NYSE: ENLC) (NYSE: WES) (NYSE: EPD) (NYSE:MPLX) ((NYSE: MCO)

ET EV to EBITDA (Forward) data from YCharts

ET EV to EBITDA data from YCharts

The midstream industry as a whole now 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 good shape, as evidenced by the recent upgrade of its senior unsecured debt by Moody’sand its distribution coverage remains robust. The company is also well positioned to capitalize on increased demand for natural gas resulting from higher electricity needs due to the expansion of artificial intelligence (AI) infrastructure. The company said it supplies 185 gas-fired power plants in 15 states and recently signed contracts for its entire system to provide over 500,000 MMBtus per day. It is also in discussions with data centers looking to increase their on-site generation capacity.

The combination of growth from increased natural gas demand and a potential upside (as stock valuations rise) makes Energy Transfer one of the most interesting energy stocks around. Investors also get a yield of nearly 8%, so this seems like a good time to buy the stock at current levels.