Earnings Insight: Energy Transfer vs. Plains All American Pipeline

Increased growth potential and distribution yields from Plains All American Pipeline could entice investors away from Energy Transfer. With higher cash flow coverage and growth in distributions, PAA offers attractive income opportunities for investors.

Date: 24-05-2025

AI Rating: 7

Comparative Analysis of Energy Transfer and Plains All American Pipeline

Energy Transfer (ET) remains a solid investment for income-seeking investors, offering a 7.4% distribution yield with a steady increase each quarter. However, it faces competition from Plains All American Pipeline (PAA), which boasts a higher yield of 9.1% and a more aggressive growth strategy for its distributions. PAA has recently increased its payout by nearly 20% and aims for an annual growth of about 10%, significantly outpacing Energy Transfer's target growth rate of 3% to 5%. This presents a concern for ET's stock as more investors may prefer PAA's stronger growth trajectory.

Free Cash Flow and Distribution Coverage

When analyzing free cash flow and distribution coverage, Plains All American achieved a coverage ratio of 1.7x, which is lower than Energy Transfer's 2x ratio but still highlights the financial stability of both companies. Both companies are involved in long-term contracts that provide stable cash flow; however, Plains’ cash flow is currently more variable. Notably, PAA plans to reinvest excess cash into capital projects aimed at expanding its operations, which could further increase its revenue-generating capacity, potentially leading to upward pressure on its stock price.

Financial Strength and Risk Assessment

Plains All American Pipeline's leverage ratio stands at 3.3x, which is at the lower end of its target range compared to Energy Transfer’s leverage of 4.0x-4.5x range. The lower leverage implies that PAA carries less financial risk in times of market volatility. Energy Transfer's higher leverage could indicate greater risk, which may deter cautious investors looking for stability.

Investor Preference and Stock Valuation

The introduction of Plains GP Holdings (PAGP) offers an alternative for investors seeking a similar income without the complexities of K-1 forms. This alternative might appeal to long-term investors considering retirement accounts, potentially increasing the demand for PAA shares. If PAA continues on its trajectory of high distribution growth, it could see positive stock price movement, drawing attention away from Energy Transfer in the coming months.

Stocks: ET PAA PAGP