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Is Energy Transfer Still a Buy After Its Nearly 20% Rally?

Energy Transfer (NYSE: ET) has rallied nearly 20% this year. Add in the master limited partnership's (MLP) high-yielding distribution, and the total return is up to 25%. That has outperformed the S&P 500's total return of more than 20%.

While the MLP might not be as cheap as it was to begin the year, it should still have plenty of fuel to grow value for its unitholders in the future. Here's why it still looks like a compelling buy after its rally, especially for those who want to collect a lucrative and growing passive income stream.

What fueled Energy Transfer's surge?

Energy Transfer is having a strong year. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 20% in the second quarter to almost $3.8 billion. Meanwhile, its distributable cash flow surged 32% to over $2 billion.

Several factors helped fuel its robust growth. The biggest catalyst has been acquisitions. Energy Transfer closed its $1.5 billion acquisition of Lotus Midstream last May and followed it up with its $7.1 billion merger with fellow MLP Crestwood Equity Partners in November. Those highly accretive deals helped fuel record volumes across several categories during Q2. The MLP also benefited from strong market conditions and recently completed organic expansion projects.

Energy Transfer's growing cash flow has enabled it to increase its distribution. Its payout is up more than 3% over the past year.

Meanwhile, its growing earnings and excess free cash flow have strengthened its financial profile. Energy Transfer's leverage ratio is now in the lower half of its 4.0 to 4.5 times target range.

That strong financial profile has enabled the company to continue expanding. It recently closed its highly accretive $3.1 billion acquisition of WTG Midstream. It also formed an accretive joint venture with affiliated MLP Sunoco LP to combine their crude oil and produced water assets in the Permian Basin. As a result, the MLP is on track to grow its adjusted EBITDA by more than 12% at the midpoint to over $15 billion this year.

Plenty of fuel to continue growing value

Despite its surging unit price, Energy Transfer still trades at a bottom-of-the-barrel valuation compared to its midstream sector rivals.

ET EV to EBITDA Chart

ET EV to EBITDA data by YCharts.

It's even cheaper when looking at its forward enterprise value (EV) to EBITDA multiple (less than 8.0 times compared to 9.5x-12x for its peer group). That low valuation is why it has such a high distribution yield (nearly 8%).

There's no reason for Energy Transfer to have such a low valuation. The MLP has significantly improved its financial profile in recent years, evidenced by a leverage ratio trending toward the low end of its target range. Meanwhile, its earnings are growing briskly, fueled by its consolidation strategy and organic expansion projects.

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