The energy sector isn’t exactly the darling of investors, often overlooked until certain events bring it back into the spotlight. During the pandemic, it languished, only to see a dramatic rise in energy prices in 2022 thanks to the reopening of economies and geopolitical tensions like Russia’s invasion of Ukraine. Prices eventually settled, but the sector’s story doesn’t end there.
Now, the buzz around electricity generation is louder than ever, fueled by the surge in AI data centers demanding more power than we’ve seen in decades. Two stocks, in particular, have the potential to thrive amidst these changing dynamics. They remain attractively priced, making them worth a closer look.
### Energy Transfer
Energy Transfer (ET 0.86%) is noteworthy among master limited partnerships, boasting over 20,000 miles of pipeline that span the U.S., transporting everything from natural gas to crude oil. It’s a major player in the midstream industry, covering key regions from Texas across the Gulf Coast and reaching up through the Midwest to the Bakken formation and Michigan.
Investors might be interested to know that Energy Transfer currently offers an impressive distribution yield of 6.6%. Don’t be fooled into thinking this is just a dividend play; the company is on a growth trajectory. In the fourth quarter of 2024, they saw an 8% rise in adjusted EBITDA, and they’re eyeing another 5% increase for 2025. Looking forward, growth might pick up even more steam in 2026 and beyond, as they’ve hiked their growth-oriented capital expenditure forecast by 67% from $3 billion in 2024 to $5 billion for 2025.
This increase parallels what’s happening with cloud hyperscalers, who are ramping up their own spending to build AI data centers in the coming year. Energy Transfer is directing a significant portion of its investments to support this very expansion.
In fact, the company received requests to connect its natural gas pipelines to 70 new data centers in 12 states. Among noteworthy deals is their agreement with CloudBurst, a private data center operator, to supply up to 450,000 MMBtu/d of natural gas directly to CloudBurst’s facility in San Marcos, Texas, bypassing the electricity grid.
Despite the promising outlook driven by AI-related growth and a sizable dividend yield, Energy Transfer’s stock is trading at a modest eight times last year’s distributable cash flow. This blend of potential growth, substantial dividends, and a low valuation makes Energy Transfer a compelling opportunity amid the AI data center expansion.
### TotalEnergies
France’s TotalEnergies (TTE 0.33%) shares similarities with major U.S. oil and gas counterparts in terms of its vast, diverse portfolio. However, TotalEnergies sets itself apart in a few key areas. Firstly, it’s channeling some of its earnings into renewable electricity generation and distribution more aggressively than its American peers. Secondly, its stock comes at a more attractive price point.
Currently, TotalEnergies trades at around nine times its trailing earnings and 7.6 times forward earnings estimates. This is particularly appealing given its comparably lower debt levels than most oil and gas majors, with just $10.9 billion in net debt alongside a $136 billion market cap.
TotalEnergies is well-rounded in its operations, engaging in upstream oil and gas production, integrated LNG exports and imports, electricity generation and distribution, refining, and energy trading. In 2024, these divisions generated $29.9 billion in operating cash, from which $15.7 billion was returned to shareholders. This hefty return comprised $8 billion in share buybacks and $7.7 billion funneled into the company’s growing 5.6% dividend.
The total shareholder return amounts to an impressive 11.5% yield at present share prices. Owing to its low valuation, TotalEnergies reduced its share count by 5% last year while still maintaining investments and a sturdy balance sheet.
This could explain the discount TotalEnergies enjoys compared to its U.S. rivals who trade at higher multiples—its European tax burden and renewable energy investments might cause some investor skepticism. However, TotalEnergies’ operations span globally, including stakes in the U.S., such as partial ownership in several LNG export facilities. Moreover, its earnings are reported post-tax, making after-tax earnings a more relevant metric for valuation.
Interestingly, while returns from TotalEnergies’ renewable division traditionally lagged behind its oil and gas returns, improvements have been noteworthy. In 2024, the company achieved a 10% return on capital employed from its integrated power portfolio, up from 7% in 2021 and nearing the company average in the mid-teens.
Therefore, there’s little justification for TotalEnergies’ valuation discount relative to U.S. integrated giants. As such, this diversified energy titan emerges as another wise choice for investors today.
