Capturing Data Center Natural Gas Demand At 8% Yield

This article first appeared on GuruFocus.

I’m entering the discussion on Energy Transfer (NYSE:ET) with this analysis. It’s been a personal favorite since I began exploring ways to benefit from the data center expansion beyond simply investing in major technology companies. Natural gas will serve as the primary fuel source for these large-scale infrastructure developments, and ET is exceptionally well-positioned to capitalize on this trend.

Despite numerous favorable industry dynamics, the company continues trading at a substantial discount on an EV/EBITDA basis. My analysis reveals an undervaluation that appears unjustifiable when considering the growth prospects across each business segment. As an integrated midstream operator, the risk profile is significantly lower since the business model is volume-driven rather than market price-dependent. The investment case becomes even more compelling with the current yield exceeding 8%. This represents an attractive opportunity in a quality company.

ET operates a highly diversified business structure comprising 6 major segments. The company has been quite active in recent years, consolidating operations and expanding several segments through acquisitions and growth capital investments. A frequently cited advantage for ET is its exceptional diversification as a midstream business, which reduces volatility and enhances stability. For a high-yield enterprise like this, such characteristics are essential.

Before diving into growth projections, we need to address why Energy Transfer trades at a 32% discount to midstream peers despite having comparable assets and growth opportunities. The market isn’t mispricing ET due to ignoranceit’s pricing a decade-long track record of growth that didn’t translate to per-unit value creation.

Since 2015, ET has deployed tens of billions in growth capital, expanded EBITDA substantially, and grown its asset base. Yet unitholders saw flat-to-modest per-unit cash flow growth during much of this period as unit issuance and capital intensity diluted the benefits. The company grew the pie but cut it into more pieces.

This history explains the persistent discount. Investors learned that ET’s growth doesn’t necessarily mean their units become more valuableit often just means more units outstanding capturing similar per-unit economics. Kinder Morgan, by contrast, spends comparable amounts on growth capital but delivers per-share FCF growth, which is why the market assigns it a premium multiple.

Here’s the critical observation that reframes the investment case: Since 2015, ET has distributed approximately $11 per unit in cumulative distributions. At today’s price of $16.50, existing unitholders have recovered roughly two-thirds of their original investment through distributions aloneand still own the units.

This shifts the question from ‘Will ET’s growth drive unit price appreciation?’ to ‘At $16.50 with an 8% yield, do I need growth to work perfectly?’ The answer appears to be no. The current valuation already assumes mediocre capital allocation and modest per-unit economics. Any improvement in incremental returnswhether from data center demand, improved contract terms, or disciplined capital deploymentbecomes upside rather than a requirement for the thesis to work.

This is the lens through which sophisticated value investors like Leon Cooperman (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio), and Murray Stahl (Trades, Portfolio) appear to be evaluating ET in 2024-2025. They’re not betting on transformational growththey’re buying a durable 8% yield trading at a third below peers, with data center demand providing downside protection and optionality rather than being the primary return driver.

The first segment, accounting for approximately 7.3% of total operations, focuses on the company’s gas transportation activities. This represents a fundamental component of midstream operations, with revenues typically driven by consistent volumes. The advantage of midstream companies lies in the stability of volumes, which may occasionally spike when prices become more attractive for upstream producers. However, volumes rarely decline significantly because upstream companies cannot simply halt operations to wait for improved commodity prices.

In the most recent quarter, ET reported combined revenues of $1.472 billion. All revenue figures mentioned here reflect external customers, as this is the most relevant metric for analysis. Year-over-year, the segment achieved revenue growth of 17.4%. The majority of this growth stems from increased US production, which rose 6% last year, along with elevated export levels. The country recently exceeded 10 million tons of liquified natural gas exports in a single month. Given the strategic location of ET’s pipeline network, the company is remarkably well-positioned to capitalize on this trend through direct access to ports, terminals, and downstream companies in Texas and South Carolina, where much of the export activity is concentrated.

Overall, the segment generated gross profit of $923 million with a gross margin of 62.7%, approximately 60% originating from interstate operations. EBITDA reached $661 million, representing an EBITDA margin of 44.9%. While this was substantially lower than the prior year’s quarter at 66.3%, the considerable revenue growth more than compensated for the margin compression.

The midstream segment focuses on gathering and processing raw natural gas. This segment has been substantially enhanced over the past year through two significant acquisitions: WTG Midstream in 2024 for $3.25 billion and Crestwood in 2023 for $7.1 billion.

The first acquisition added approximately 6,000 miles of gas gathering pipelines and 8 processing plants with 1.3 Bcf/d capacity. The second acquisition contributed additional complementary gathering and processing facilities in the region. Recent segment improvements include the Grey Wolf upgrade, expanding capacity from 200 MMcf/d to 250 MMcf/d. While the additional capacity will have a marginal impact on overall volumes, it should contribute more meaningfully to EBITDA. Total gathering volumes reached 21.6 Bcf/d last quarter, meaning the Grey Wolf upgrade would add approximately 0.23% more capacity. With typical processing margins ranging between $0.5 and $1 per Mcf, the midpoint suggests this upgrade could contribute roughly $14 million in additional annual EBITDA.

Regarding last quarter’s performance, revenues totaled $819 million from external sources and $2.173 billion from intersegment activity. This is the only segment where intersegment revenues exceed external revenues. This represents the one exception to my earlier emphasis on prioritizing external revenues. It’s a foundational component of ET’s operations, demonstrating throughput activity and serving as an industry standard for integrated MLPs like ET.

Gross profits came in at $1.246 billion, up modestly from $1.207 billion. Gross margins declined from 43.7% to 41.6%. Over the past 9 months, however, revenues increased by $1.744 billion, driven largely by higher gathering volumes.

With the third segment, we move into one of ET’s higher-grossing business units. A significant portion of the assets are located in Mont Belvieu, Texas, which happens to be one of the epicenters of the NGL market. Approximately 27% of the 2025 growth capital allocation is directed toward this segment. Notably, part of this includes a 165,000 Bbls/d fractionator in Mont Belvieu, which would elevate total capacity to 1.3 million Bbls/d.

Last quarter’s revenues remained flat year-over-year at $5.853 billion, with $4.919 billion from external customers. EBITDA grew from $1.012 billion to $1.054 billion, reflecting an 18% margin. Most of this improvement appears attributable to lower unrealized losses on risk management activities rather than reduced OPEX, as that figure increased by approximately $50 million year-over-year.

The fourth segment encompasses crude oil transportation, including pipelines, storage, terminals, and related services. It’s heavily dependent on output from the Permian Basin, the largest and most significant oil field in the United States. Compared to other fields like Bakken or Eagle Ford, the Permian has been a substantially larger contributor to US oil production. However, the growth witnessed over the past decade is beginning to moderate somewhat, with some analysts estimating we’re approaching a production peak for the basin. I mention this because earlier this year, Occidental Petroleum’s (OXY) CEO Vicki Hollub expressed concerns about Permian output during the Q1 2025 earnings call.

It’s looking like with the current headwinds or at least volatility and uncertainty around pricing in the economy and recessions and all of that, it’s looking like that peak could come sooner. So I’m thinking right now the Permian is, if it grows at all through the rest of the year, it’s going to be very little.

Quarterly revenues reached $6.043 billion, all from external customers. The concerns raised by OXY’s CEO appear to have merit, as segment volumes contracted by 111 MBbls/d in terminals while growing 392 MBbls/d in transportation. This presents a mixed picture, though the revenue decline is evident. Compared to the first nine months of last year, revenues decreased by $4.2 billion. EBITDA remained resilient, declining only $197 million during that period. During Q3, EBITDA margins were 12.3%, up from 10.5% last year. This improvement primarily reflects enhanced gross margins.

This represents an intriguing component of ET’s business. The two investments in Sunoco LP (SUN) and USA Compression Partners (USAC) are generating substantial earnings for ET. ET holds a 21% stake in SUN and a 39% stake in USAC.

Last quarter, the segment produced combined revenues of $6.257 billion. Investments in SUN generated $489 million in EBITDA, while $160 million came from USAC. Because the majority of operational responsibilities rest with these two separate companies, ET can derive substantial EBITDA while maintaining a favorable risk profile.

The final segment covers marketing, corporate activities, and other ancillary services. Nearly 50% of revenues are intersegment, with combined revenue totaling $923 million.

The segment posted negative EBITDA of $23 million for the quarter and negative $58 million for the first nine months. While this segment isn’t designed to be highly profitable per se, the EBITDA decline from a positive $29 million last year during the first nine months represents a disappointing shift.

This chart displays Adj EBITDA and Adj EBITDA as a percentage of total assets for each segment over the last 9 months. It demonstrates relatively consistent returns across all business units, with gas liquids leading at an 11% return. I find this an effective method for evaluating asset efficiency and determining the greatest return on CapEx. Numbers are expressed in billions of USD.

In ET’s latest November presentation, the company outlined their full year 2025 growth capital allocation plan, showing nearly a third directed toward interstate gas. ET attributes a large portion of this to data center expansions, the High Brinson pipeline, and storage expansion, among other projects. I view this as the appropriate strategic direction for the company, as the data center industry is experiencing rapid growth and natural gas represents the optimal solution for meeting this additional energy demand. It’s the fastest to deploy and offers very high output. New technologies are also emerging that capture emissions and convert them into additional energy on-site.

Here’s where the investment case becomes compelling: the data center expansion isn’t required for ET to deliver acceptable returns at current valuations, but it materially improves the risk-reward by providing volume visibility and distribution coverage. Data center energy demand is projected to grow approximately 15% annually through 2030, creating 25 Bcf/d of incremental gas demand by 2030 according to East Daley Analytics. This isn’t speculativeit’s contracted demand with clear timelines and committed capital.

US gas demand could grow by 25 Bcf/d (708mn m/d) by 2030 due to both data centers expansions and LNG exports, according to East Daley Analytics senior director Jack Weixel. Surging demand for gas-powered electricity from artificial intelligence (AI) data centers will likely grow demand by 5 Bcf/d by 2030, Weixel said today at the Midcontinent LDC Gas Forum in Chicago, Illinois. That matches the 4-8 Bcf/d AI-spurred growth estimated by ConocoPhillips senior market analyst James Pearson, who spoke earlier in the day at the forum.

One report estimates demand will grow by 25 Bcf/d by 2030. ET’s assets are predominantly located in and around the Permian Basin. Natural gas pipelines are the most geographically diverse, extending from the south up to Virginia and the New York area.

The reason I emphasize ET’s asset locations is straightforward. They directly overlap with where most large and hyperscale data centers will be constructed in the US. Given this information, it seems highly plausible that ET will be able to capture a substantial portion of the increased natural gas production demand.

ET currently has 21.6 Bcf/d in gathering volumes as of Q3. The earlier figure suggested that by 2030, the entire incremental demand would exceed ET’s current total volume capacity. Given ET’s geographic footprint, a conservative estimate would be the company capturing 15% of this growth, or 3.75 Bcf/d in incremental volume by 2030.

This table assumes a 15% market capture of the forecasted demand. Given ET’s footprint, I could envision this increasing toward the 20% range instead. The company maintains $3.5 billion in cash with very manageable long-term debt of $63 billion. Interest expense totaled $3.3 billion over the past 12 months, yet ET still generated substantial profit of $4.5 billion. With interest rates likely declining, access to additional capital will become more affordable, allowing ET to leverage this advantage to secure market share.

Energy Transfer’s capital allocation strategy has shifted toward high-return brownfield expansions rather than speculative mega-projects. The company deploys approximately $3-4 billion annually in growth capital, focusing on debottlenecking existing facilities and modest capacity additions with contracted demand. These projects typically achieve 15-20% unlevered returns with minimal execution risk.

The Grey Wolf processing expansion exemplifies this disciplined approacha modest $50-75 million investment for 25% capacity increase that generates returns well above the company’s 6-7% weighted average cost of capital. Management maintains a healthy spread between project returns (averaging 12-14%) and capital costs, ensuring growth investments enhance rather than dilute distributable cash flow.

With data center demand providing clear volume visibility through 2030, ET’s 2025-2027 growth capital program appears well-positioned to deliver attractive returns while supporting distribution growth. The focus on contracted or highly visible demand rather than speculative capacity additions demonstrates the operational discipline that differentiates ET from peers willing to chase volume at lower returns.

The core question for ET unitholders is simple: Can the company sustain and modestly grow its distribution while maintaining coverage? Below are my growth assumptions, but importantly, even conservative scenarios where growth disappoints would still support the current 8% yield. Data center growth and export demand represent upside to this base case rather than requirements.

The table below presents forecasted revenues based on the previously mentioned CAGR assumptions. The 2025 figure is derived from the average of each quarter this year, multiplied by 4.

I believe the value proposition here for ET and investors is quite significant. Adjusted EBITDA margin has been solid this year, and I anticipate modest incremental improvement over the next 5 years.

By 2030, if data center demand continues and natural gas production expands, seeing ET generate nearly $24 billion in annual adjusted EBITDA doesn’t seem unrealistic. The growth assumptions are relatively conservative. The objective here is to assess how well the company can continue distributing its dividend and potentially grow it further.

Over the past 5 years, the dividend has increased by an average of 4.26% annually. The company has an above 100% payout ratio, which typically isn’t ideal as it can strain business finances. However, given the EBITDA growth in my forecast, I believe ET is well-positioned to move below the 100% payout ratio.

With these calculations, we can see that the payout ratio is likely nowhere near 100% if my 2026 assumptions prove accurate. This is because payout ratios are determined based on net income rather than distributable cash, which ET generates in abundance.

The company has distributed $4.4 billion over the last 12 months, equating to a payout ratio of 30%. I consider this very sustainable with room for further growth. More importantly from a unitholder perspective, distributable cash flow per unit has remained stable at approximately $2.30-$2.40 over the past several years despite aggressive growth spending. The annual distribution of $1.27 per unit (based on current quarterly rate of $0.3175) implies a 53% payout ratio on a per-unit DCF basiswell below the 70-80% range that would raise sustainability concerns. Even if incremental growth capital earns only modest returns (8-10% unlevered), the distribution has substantial coverage. This is the margin of safety that makes the 8% yield compelling. Given the 5-year CAGR for the dividend of 4.26%, I believe ET can maintain this trajectory long-term if growth persists.

The company is approaching the same forward yield levels as in late 2023. I consider the combination of an 8.06% forward yield and substantial industry tailwinds to represent a compelling investment opportunity.

As of today (23rd November), the company has an EV of $132.94 billion. A substantial portion of this reflects debt, totaling $63.97 billion.

Based on my earlier EBITDA estimates, the forward EV/EBITDA appears as follows. It demonstrates clear undervaluation while simultaneously producing substantial earnings growth.

The peer group includes: Enterprise Product Partners (EPD), MPLX (MPLX), Williams Companies (WMB), Kinder Morgan (KMI), Plains All American (PAA), ONEOK (OKE), and Western Midstream (WES).

According to my model, you’re acquiring ET at nearly a third of the peer group valuation. This discount exists for defensible reasonsET’s track record of growth without proportional per-unit value creation. But at current levels, you’re not paying for perfect execution. You’re buying an 8% yield with stable coverage, $11 in cumulative distributions since 2015 against a $16.50 unit price, and option value on data center demand improving incremental returns. Even if ET continues allocating capital at average-to-mediocre returns, the current valuation already reflects that outcome.

The investment case for Energy Transfer doesn’t require believing the company has suddenly transformed its capital allocation. The market has learned over the past decade that ET grows EBITDA but often dilutes per-unit value through unit issuance and capital intensity. This history justifies the 32% discount to peers.

What makes ET compelling at $16.50 is that you don’t need transformational improvement to generate acceptable returns. You’re buying:

• A durable 8% yield with strong distribution coverage (53% payout ratio on per-unit DCF)

• A company that has returned $11 per unit since 2015, recovering two-thirds of today’s unit price through distributions alone

• Geographic positioning that provides first-mover advantage on data center gas demand, but doesn’t require perfect execution on that opportunity

• A valuation that already assumes mediocre capital allocationany improvement becomes upside

The presence of sophisticated value investors like Leon Cooperman (Trades, Portfolio), Bruce Berkowitz (Trades, Portfolio), and Murray Stahl (Trades, Portfolio)particularly Berkowitz, who has spent over 10,000 hours studying the midstream spacesuggests this setup is attracting serious capital from investors who understand both the business quality and the historical challenges.

This is not a bet on ET becoming the next Kinder Morgan with disciplined, per-unit-accretive growth. It’s a bet that at a third below peers, with an 8% yield and modest growth requirements, the risk-reward is sufficiently skewed even if history largely repeats. Data center demand provides downside protection and optionality, not the core return driver. That’s the honest case for Energy Transfer at current levels.