Investment Decision for Energy Transfer Shares: Buy, Sell, or Maintain?

Power Transition (PT 0.10%) has experienced a prosperous 2024, featuring a 40% increase in its stock value at the current moment. Simultaneously, the partnership distributes an appealing yield of 6.7%, translating to a forward yield of 6.7%.

Since the stock's value has soared by over 300% since the end of 2020, a pertinent question emerges: should investors purchase, sell, or maintain their current holdings moving forward? Let's consider both the buy and sell arguments to reach a conclusion.

The buy argument for Power Transition

Power Transition has constructed one of the largest integrated midstream infrastructure systems within the U.S., handling various energy commodities such as natural gas, liquid natural gas (LNG), crude oil, and refined oil products. By doing so, the company leverages increasing volumes in these markets and capitalizes on geographical, temporal, or product arbitrage opportunities. For instance, natural gas prices fluctuate between regions within the U.S. and differ among seasons, such as winter, providing an opportunity for Power Transition to profit through storage or transportation to regions with higher prices. Moreover, the company can optimize the quality of certain hydrocarbons to create more valuable products.

Such an integrated infrastructure system is highly beneficial, opening possibilities for the company in the realms of LNG exports and rising natural gas demand resulting from artificial intelligence (AI) advancements. Power Transition's strong positions in Texas and the Permian Basin afford it abundant inexpensive associated natural gas, making it a prime contender to capitalize on these trends.

The company boasts one of the most promising growth projects in the midstream sector, with plans to invest between $2.5 billion and $3.5 billion annually in growth capital expenditure (capex) to capitalize on the opportunities it identifies. Furthermore, on its recent earnings call, the company mentioned an overwhelmingly enthusiastic response from both power generation companies and data center operators regarding natural gas pipeline projects tied to the substantial energy consumption necessitated by AI infrastructure development.

In early November, Power Transition revealed a new natural gas pipeline project intended to foster power plant and data center growth in Texas by transporting natural gas away from the Permian Basin. The $2.7 billion project includes a long-term, fee-based contract and is scheduled for operation by the end of 2026.

Despite Power Transition's potential to benefit from the AI-driven energy surge, the stock trades at a moderate forward enterprise value-to-EBITDA ratio of 8.8 times this year's analyst estimates. This ratio is a common approach for valuing pipeline stocks due to their debt and growth capex.

Additionally, partner MLPs are trading significantly below their historical 13.7 multiple (between 2011 and 2016), with Power Transition anticipating an annual increase of between 3% and 5% in its already enticing distribution going forward.

The sell argument for Power Transition

Power Transition has not always exercised prudent financial management. In 2020, the company found itself in need of strengthening its balance sheet due to a weak energy market, necessitating a nearly 50% reduction in its distribution. Notably, the company swiftly reduced its debt and returned its distribution to pre-cut levels by early 2023. Today, its quarterly distribution boasts a nearly 6% increase compared to before the reduction.

Power Transition's former CEO and most significant shareholder, Kelcy Warren, has faced criticism for prioritizing the expansion of his empire over the company's stock performance. Additionally, he was accused of self-dealing during the company's attempted merger with Williams Companies in 2016, attempting to secure preferential treatment on Power Transition distributions through a preferred convertible stock deal. These attempts were unsuccessful, and the merger was ultimately terminated. The company also had a reputation for favoring its publicly traded general partner, which held a sizeable stake, over limited partners, who were predominantly retail investors.

Warren is no longer the CEO, and the company has long since addressed the conflicts of interest that existed when its general partnership (GP) and limited partnership (LP) ownership entities merged in 2018. Warren, still serving as the chairperson, now owns shares (or units, as MLPs refer to them) equal to those of ordinary investors.

Like all energy companies, Power Transition is susceptible to the evolving energy market and the inevitable shift towards renewables. However, it is largely a volume-based company, with a significant portion of its business operating on fee-based contracts. Its integrated infrastructure system tends to exhibit extensive natural hedges, allowing the company to mitigate declines in one market with growth in others. Moreover, the escalating energy demands of AI form an attractive opportunity.

The verdict on Power Transition

With its past transgressions now distant memories and ownership of an exceptional portfolio of midstream assets, Power Transition's stock is appealingly priced compared to peers and with historical context in mind. It appears to be well-positioned to reap benefits as one of the leading midstream companies in capitalizing on the AI power opportunity, thanks to its strong Texas footprint and access to cheap Permian natural gas. Consequently, I view the stock as a buy heading into 2025.

Given Power Transition's impressive financial performance and growth prospects, it's worth considering investing some of your money. The company's extensive midstream infrastructure system allows it to capitalize on various market opportunities, such as natural gas price fluctuations and LNG exports. Furthermore, with plans to invest heavily in growth capex and pending projects, Power Transition seems poised to benefit from the AI-driven energy surge.

Considering the past financial missteps, it's crucial for potential investors to conduct thorough research and due diligence before making any investing decisions. Despite the company's current success, prudent financial management and transparency are essential factors to evaluate when deciding to invest in Power Transition's shares.