Energy Transfer is seeing strong growth projects spring from increasing power demand coming from AI data centers.
Western Midstream is making a big push into the produced water business.
Both stocks carry high dividend yields and are attractively valued.
If you’ve got $1,000 and want to start, or add to, a portfolio of high-yielding stocks to eventually help generate income in retirement, the master limited partnership (MLP) space is a great place to look. The pipeline stocks in the sector are trading at historically low valuations, while generally being in better financial shape than in the past and also having promising growth opportunities in front of them.
Let’s look at two no-brainer MLPs to buy now.
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It’s rare to find a stock in a sector that has some of the best growth prospects while also trading at one of the cheapest valuations, but that is what an investment in Energy Transfer (NYSE: ET) gives you. The most common way to value midstream companies is using an enterprise value (EV)/EBITDA multiple, and on that front, Energy Transfer trades at just 7.5 times 2026 analyst EBITDA estimates. To put that in perspective, the average midstream MLP traded at a 13.7 times multiple between 2011 and 2016.
At the same time, Energy Transfer sports a yield of 7.6%, and it plans to increase its distribution at a 3% to 5% pace moving forward. Its balance sheet is in solid shape, and its distribution is well covered, with it having a nearly 1.7 times coverage ratio based on its distributable cash flow (operating cash flow minus maintenance capex). Approximately 90% of Energy Transfer’s operating income comes from fee-based businesses, which means it has minimal direct exposure to changes in commodity prices or spreads. It also has the highest percentage of take-or-pay contracts in its history, which means that it gets paid whether or not customers use the capacity on its systems.
Given its strong position in the Permian Basin, which is home to some of the country’s cheapest natural gas, Energy Transfer has a number of high-return growth projects, highlighted by its Hugh Brinson and Desert Southwest Pipeline projects. Energy Transfer has said that the Hugh Brinson Pipeline, which will transport natural gas from the Permian to markets throughout Texas to help meet growing power demands from data centers, could become its most valuable asset. The company plans to spend up to $5.5 billion in growth capex this year, making Energy Transfer a rare combination of a high-yield growth stock at a low price.
Image source: Getty Images.
Trading at a forward EV/EBITDA multiple of 8.5 times, Western Midstream Partners (NYSE: WES) isn’t as cheap as Energy Transfer, but it’s still inexpensive. Meanwhile, it carries a yield of 8.6% and plans to grow its distribution by a mid- to low-single-digit clip moving forward. Like Energy Transfer, its business is also largely fee-based, with 95% of its natural gas contracts and all of its liquids contracts set up that way.
Western also has one of the best balance sheets in the pipeline space, with leverage of just 2.8 times at the end of last quarter. It used that balance sheet strength to go out and acquire Aris Water Solutions, which it will help use as part of the foundation for its push into the produced water solutions business in the Delaware Basin. Its largest growth project is also in this area. It is currently expanding its North Loving natural gas facility, and will connect it to its Pathfinder Pipeline project, which will have the capacity to move 800,000 barrels of produced water per day. Both projects are expected to come online in the first quarter of 2027, setting Western up for solid growth that year.
The deal for Arris also helps diversify Western’s customer base. Before the deal, nearly 80% of its water volumes came from its parent Occidental Petroleum, but that moved to below 45% after the deal. This should also open the door for it to pursue more growth opportunities with other companies outside of Oxy. Produced water in the Delaware is a big opportunity, and Western is now setting itself up to be one of the primary players in this space within the basin.
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Geoffrey Seiler has positions in Energy Transfer and Western Midstream Partners. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
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