Energy Transfer Fuels the Cloud: A Natural Gas Power Play

Key Points

• Energy Transfer's strategic expansion into powering data centers signifies a forward-looking approach to capitalize on the escalating energy demands of the growing digital economy.
• Leveraging its natural gas infrastructure, Energy Transfer is tapping into new revenue streams within the digital sector, demonstrating strategic diversification.
• Energy Transfer's expansion into data center power, driven by record earnings, offers a promising path to continued growth and market leadership.

The digital world is rapidly expanding, driving advancements in cloud computing and artificial intelligence (AI). The rapid growth of data centers has resulted in a surging demand for energy, a crucial resource for their operations. The increasing demands of expanding global networks and internetworks necessitate a substantial and ever-growing energy supply to maintain the operational functionality of the data centers, which constitute the physical foundation of this digital infrastructure.

Energy Transfer LP NYSE: ET is typically recognized for its substantial oil and gas pipeline network, but now it is strategically venturing into the developing digital infrastructure market.

By utilizing its extensive natural gas infrastructure to power energy-intensive data centers, Energy Transfer’s business strategy is undergoing a notable transformation.

This strategic move prompts a crucial question: What are the chances of natural gas becoming a primary fuel source for cloud computing, and how is Energy Transfer's strategy adapting to leverage this potential shift?

Strong Profits Propel Energy Transfer Forward

Energy Transfer's earnings release for the fourth quarter and full year of 2024 (Q4 FY2024) provided a look at the solid foundation the company has built for its strategic ambitions. Energy Transfer’s financial results for the entirety of 2024 were record-setting, with an adjusted EBITDA of $15.5 billion, a notable 13% increase when compared to the $13.7 billion reported in 2023. Distributable Cash Flow (DCF), a critical metric for master limited partnerships like Energy Transfer, also reached a record high of $8.4 billion, marking a 10% increase year-over-year.

The final quarter of 2024 mirrored this overall strength. Adjusted EBITDA for Q4 reached $3.9 billion, surpassing the $3.6 billion recorded in the same period last year. Distributable Cash Flow for the quarter remained consistent with the prior year's Q4 at $2.0 billion. These figures were underpinned by record-setting volumes across key operational segments, including Interstate transportation, Midstream operations, NGL transportation, and Crude Oil transportation, along with record NGL exports from the Partnership’s terminals.

This financial health is further highlighted by Energy Transfer's commitment to returning value to its unitholders. The partnership announced an increase in its quarterly cash distribution to $0.3250 per common unit, equating to an annualized rate of $1.30. This represents a 3.2% increase compared to the distributions in the fourth quarter of 2023 and translates to a compelling yield of approximately 6.50% based on Energy Transfer’s stock price as of February 11, 2025. The next quarterly payment is scheduled for February 19, 2025, to unitholders of record as of February 7, 2025.

Looking forward, Energy Transfer's guidance for 2025 projects continued financial strength, estimating adjusted EBITDA to fall within the range of $16.1 billion to $16.5 billion. This positive outlook is supported by a substantial capital expenditure budget, with approximately $5 billion allocated for growth projects and $1.1 billion for maintenance, demonstrating a commitment to expansion and operational reliability.

While the earnings release was overwhelmingly positive, it is worth noting that the reported earnings per share (EPS) for Q4 2024 of $0.29 did slightly miss analyst consensus estimates of $0.35, and revenue marginally trailed expectations. However, these minor deviations are overshadowed by the overall financial performance, which provides a strong financial springboard for Energy Transfer to pursue strategic initiatives, including its new venture into the data center power market.

Gas in the Machine: Energy Transfer Plugs Into the Cloud

Energy Transfer's strategic diversification into the data center sector is further strengthened by its recent long-term agreement with CloudBurst Data Centers, announced on February 10, 2025. This agreement represents Energy Transfer's first major commercial contract to directly supply natural gas to power data centers.

Under the terms of the agreement, Energy Transfer, through its Oasis Pipeline, LP, is set to provide CloudBurst Data Centers with up to 450,000 MMBtu per day of firm natural gas. This supply is earmarked for CloudBurst’s flagship AI-focused data center campus, which is currently under development in Central Texas. Crucially, the natural gas supplied is intended for “behind-the-meter” power generation, capable of producing approximately 1.2 gigawatts of electricity. This power will directly fuel the data center's operations for a minimum of ten years, commencing with Phase 1, projected to be operational in Q3 2026, pending CloudBurst’s final investment decision anticipated later in 2025.

Re-Engineering Revenue: A Diversified Growth Strategy

Energy Transfer's move into the data center market is a component of a broader strategic vision centered on diversification and growth in a rapidly evolving energy sector. While its traditional midstream operations remain the core of its business, the partnership is actively pursuing strategic expansions into new sectors, particularly within the natural gas value chain and adjacent high-growth markets.

Energy Transfer's strategy is centered on leveraging the expected long-term growth in natural gas demand, both domestically and internationally. This is exemplified by their commitment to the expanding LNG export market through the development of the Lake Charles LNG export facility, further evidenced by the recent 20-year Sale and Purchase Agreement with Chevron NYSE: CVX. Additionally, Energy Transfer is focused on bolstering its natural gas infrastructure network, as shown by the construction of the Hugh Brinson Pipeline, which will increase natural gas transport capacity from the Permian Basin to major Texas markets.

Powering the Future With Today’s Strategy

Energy Transfer's strategic shift towards powering data centers with natural gas is a significant development for the midstream company. Combined with a strong earnings performance in 2024 and a forward-looking strategy focused on diversification and growth, the partnership presents an attractive investment opportunity. As Energy Transfer moves to power the cloud with natural gas, the market is watching to see if it will become the fuel of the future for the sector, potentially adding a new chapter to this energy giant's story.