Connecting Power
In this edition of the Smart Investor newsletter, we spotlight we spotlight a company that turns energy into action. With a large share of the portfolio reporting in the coming days, we are holding off on any sell decisions for now, awaiting greater clarity. But first, let’s review the latest news and developments.
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Portfolio News and Updates
❖❖ Alphabet’s (GOOGL) Google wrapped up its Google Cloud Next ’26 event in Las Vegas. This year, the conference focused heavily on the transition from Gen AI to the agentic era, where AI moves beyond chat to autonomous task execution.
The headline launch is the Gemini Enterprise Agent Platform – positioned as the evolution of Vertex AI – built to let enterprises delegate full business outcomes to autonomous agents rather than managing individual AI tasks. Supporting the compute demand are Google’s eighth-generation TPUs: the TPU 8t for training scale and the TPU 8i for inference, backed by the Virgo network fabric capable of linking up to one million TPUs into a unified “AI Hypercomputer.”
On the data side, the new Agentic Data Cloud transforms static repositories into active reasoning engines, complete with a persistent Memory Bank for long-term agent context. Google also debuted the Agent2Agent (A2A) Protocol – an interoperability standard for cross-vendor agent collaboration – and Project Mariner, an agent that navigates web browsers autonomously to complete complex workflows.
On the security front, Google is combining its threat intelligence with Wiz – now fully part of Google Cloud – to deliver what it calls “agentic defense,” with specialized agents for threat hunting, detection engineering, and third-party risk, alongside expanded multicloud coverage.
The partnerships picture completes the strategy. Google used the conference to deepen Gemini integrations across Oracle (ORCL), Salesforce, SAP, ServiceNow, and Palantir – covering CRM, ERP, databases, IT operations, and defense-grade analytics. Taken together, the announcements sketch an unmistakable ambition: to own the full enterprise AI stack, from silicon to agents to software platforms. In other words, the Apple ecosystem model, applied to enterprise.
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❖ On the sidelines of Cloud Next, Google and NVIDIA (NVDA) announced a deepened infrastructure partnership, with Google becoming one of the first cloud providers to deploy NVIDIA’s next-generation Vera Rubin GPUs through its new A5X instances (i.e., compute environments customers rent on Google Cloud). The new chips deliver up to 10x better inference efficiency than the prior generation and can scale to nearly one million GPUs across multiple sites.
The announcement matters for both companies. For Google, early access to NVIDIA’s most advanced silicon reinforces its positioning as the premium destination for the most demanding AI workloads – a critical battleground as hyperscalers compete for frontier AI lab customers. For NVIDIA, the significance is less about demand – which is already insatiable – and more about ecosystem depth: Vera Rubin is being woven directly into Google’s Agent Platform and Gemini workflows, positioning NVIDIA silicon as the default engine powering one of the most ambitious enterprise AI stacks in the industry.
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❖ Evercore ISI flagged Google’s Virgo Network announcement from Cloud Next as an incremental positive for Arista Networks (ANET), maintaining its Buy rating and $200 price target. The firm notes that Virgo’s scale-out Ethernet fabric architecture – designed to connect up to one million GPUs across AI data centers – maps directly to Arista’s core product positioning in high-speed data center switching. ANET’s equipment dominates in hyperscale cloud environments precisely because it handles enormous traffic volumes with low latency.
The timing is notable. Arista reports Q1 2026 earnings shortly, and expectations are elevated: in its Q4 2025 release, management raised its 2026 AI networking revenue target to $3.25 billion from $2.75 billion, citing stronger-than-expected demand from cloud and AI data centers. Google’s public endorsement of Ethernet-based scale-out architecture – the exact infrastructure paradigm Arista is built for – adds an external data point that the AI networking buildout is accelerating.
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❖ Alphabet’s (GOOGL) Google is deepening its bet on Anthropic, committing to invest up to $40 billion in the AI startup – $10 billion immediately at a $350 billion valuation, with up to $30 billion more contingent on performance milestones. The announcement comes as Anthropic has secured up to $65 billion in total new funding commitments ahead of a potential IPO.
The Google-Anthropic relationship is already multilayered: earlier this month, the two companies expanded their partnership alongside Broadcom (AVGO), with Anthropic gaining access to multiple gigawatts of TPU capacity – the same chips powering Google’s own AI infrastructure. Anthropic is also tightening its ties with Amazon (AMZN), which is investing $5 billion with a commitment that could reach $25 billion.
The capital race reflects the staggering compute demands of frontier AI development. Anthropic recently disclosed a $30 billion annualized revenue run-rate, up from roughly $9 billion at year-end 2025. With Google, Amazon, and Broadcom all deeply intertwined with Anthropic’s infrastructure and finances, the company is shaping up as one of the most strategically embedded players in the AI ecosystem.
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❖❖ Microsoft (MSFT) and OpenAI have amended their landmark partnership agreement, granting the AI startup significantly more commercial freedom while preserving Microsoft’s access to its models through 2032. Under the revised terms, OpenAI can now sell its products across any cloud provider – ending MSFT’s exclusivity – while revenue sharing continues until 2030 with new caps, and Microsoft’s own revenue share obligation to OpenAI is dropped entirely. The contentious AGI clause, which would have allowed OpenAI to restrict MSFT’s access to future technology upon reaching superhuman intelligence, has also been removed.
Evercore ISI said the deal is “no major surprise,” noting that Microsoft has been telegraphing a broader multi-model strategy for some time – it now uses Anthropic models within its Microsoft 365 tools alongside OpenAI’s – while ChatGPT maker has obvious incentives to expand distribution ahead of a potential IPO. The firm views the deal as a pragmatic reset – each side gaining flexibility in exchange for reduced exclusivity. Evercore maintains its Buy rating and $580 price target on MSFT, but flags that the impact of the new one-directional revenue share on Azure economics will likely be a key question on Wednesday’s earnings call.
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❖❖ IBM (IBM) dropped post earnings despite delivering a beat on both top and bottom lines, as Q1 revenue of $15.9 billion (+9% reported, +6% constant currency) topped the $15.62 billion consensus and operating EPS of $1.91 beat the $1.81 estimate. Earnings dropped into a broader sell-off in software-related names, with investors contemplating how AI advance will affect the infrastructure and software giant. These lingering fears have periodically risen to the surface since February’s Anthropic AI tool release related to COBOL modernization hit IBM’s stock hard.
Two narratives drove the sell-off, though neither hold up under scrutiny. First, “growth slowed.” That comparison is Q1 vs. Q4 – structurally misleading for any enterprise IT company, where Q4 is always inflated by year-end budget flush. The correct comparison is Q1 vs. Q1 a year ago, and on that basis this was IBM’s strongest first-quarter revenue growth in over a decade. Operating EPS tells the same story: $1.36 in Q1 2024, $1.60 in Q1 2025, $1.91 in Q1 2026 – clean acceleration.
Second, IBM didn’t raise full-year guidance. CFO Jim Kavanaugh addressed this directly: the company has never raised guidance in a first quarter, and he said executives believe IBM should be a prudent operator given current macro uncertainty. Notably, IBM did raise where it had conviction – Software guidance was lifted to 10%+ for the full year, with the Data sub-segment now expected to exceed 20% growth, helped by Confluent.
On the AI disruption thesis, the data cuts decisively the other way. IBM Z grew 48% constant currency – a record Q1 – with the z17 explicitly positioned as an AI inference platform capable of 450 billion inferences per day. Clients using IBM’s own watsonx Code Assistant for COBOL modernization are reporting faster mainframe consumption growth, not slower. Red Hat overall accelerated to 10% constant currency growth, with OpenShift now a $2 billion ARR business and virtualization contracts topping $600 million since early 2024.
Meanwhile, IBM’s Consulting business is also undergoing AI-driven transformation. While the segment’s top line barely expanded in constant currency, over 20% of the $5.3 billion billed and recognized in Q1 came from GenAI-related engagements. Consulting’s GenAI backlog now stands at 30% of total, supporting the outlook for consulting acceleration in the back half of 2026 as that backlog converts into revenue.
Red Hat Enterprise Linux, or RHEL – the flagship commercial Linux operating system, sold as a subscription and tied to enterprise server hardware deployment cycles – notably decelerated in Q1. However, this was the result of the federal signing delays in Q4 and a dislocated hardware supply chain, rather than any competitive displacement.
The one legitimate concern: IBM quietly dropped its “generative AI book of business” metric, which had reached $12.5 billion exiting 2025 and served as the market’s primary AI progress scorecard. No explanation was offered. The bearish read is that the number decelerated uncomfortably. The charitable read is that as AI embeds across all products, isolating it into a single metric becomes increasingly artificial, and ARR approaching $25 billion may be the cleaner measure going forward. Both readings are plausible.
The thesis remains intact. Q2 is the checkpoint – on consulting acceleration, on RHEL recovery, and most importantly, on whether IBM restores transparency around its AI momentum.
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❖❖ Vertiv Holdings (VRT) delivered a beat-and-raise quarter that left little to argue with. Q1 net sales of $2.65 billion grew 30% year-over-year, with organic growth of 23% after stripping out the 4% M&A contribution and 3% currency tailwind. Adjusted EPS of $1.17 came in well above both consensus and prior guidance, up 83% year-over-year. Adjusted operating margin of 20.8% expanded 430 basis points versus Q1 2025 and beat guidance by approximately 180 basis points. Adjusted free cash flow of $653 million surged 147% year-over-year, and net leverage exited the quarter at just 0.2x – providing significant strategic flexibility.
The Americas was the engine, with organic growth of 44% driven by broad-based data center demand across nearly all product lines. APAC grew 12% organically, slightly below quarterly guidance due to timing. EMEA was the one soft spot, declining 29% organically in Q1, though management expects a return to growth in the second half of 2026 as pipeline momentum builds.
On the M&A front, Vertiv closed the BMarko acquisition, expanding structural fabrication and converged infrastructure capacity, and announced an agreement to acquire ThermoKey to bolster heat rejection and heat exchange capabilities globally. Both deals reinforce VRT’s positioning as a full-system provider for AI data center buildouts. In Q1, the company achieved investment-grade credit ratings and inclusion in the S&P 500, which it sees as meaningful validation of business strength and execution.
Full-year guidance was raised across the board. Vertiv now expects net sales of $13.75 billion at the midpoint (+34% year-over-year), adjusted operating profit of $3.2 billion (+53%), adjusted operating margin of 23.3% (+290 basis points), adjusted diluted EPS of $6.35 (+51%), and adjusted free cash flow of $2.2 billion.
For Q2, the company guided to adjusted EPS of $1.40 at the midpoint, up 47% year-over-year, on net sales of $3.25-3.45 billion. Despite the expected earnings surge, this guidance still came in below the highest Street estimates, as rapid recent growth at the maker of power and cooling equipment for AI data centers, along with its stock’s 270%+ gain over the past year, drove elevated expectations. Still, with the AI infrastructure supercycle showing no sign of slowing, Vertiv remains one of its most direct beneficiaries, with its positioning firmly reflected in the numbers.
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❖❖ Philip Morris (PM) reported a strong start to 2026, driven by continued momentum in its smoke-free product portfolio. Net revenues rose 9.1% year-over-year (2.7% organically), reaching $10.1 billion and coming well above the consensus despite tough prior-year comps. Adjusted operating income increased 10% to $4.2 billion, while adjusted EPS jumped by roughly 16% to $1.96, also ahead of estimates.
Growth was led by the international smoke-free segment, where gross profit surged 19.4% and net revenues rose 15.8%, supported by strong demand for IQOS and other reduced-risk products. Smoke-free offerings now account for over 40% of total revenue, highlighting the company’s ongoing business transformation. The performance in the U.S. was weaker due to regulatory delays, stronger competition, challenging year-over-year comparison, and inventory normalization following an overhang at the end of 2025. Despite these headwinds, ZYN remains leading nicotine pouch category with over 60% market share (by retail value) in the U.S.
Looking ahead, PM maintained its full-year adjusted EPS guidance of $8.36-8.51 (currency neutral), implying roughly 12% growth at the midpoint. The company also reconfirmed its expectations for broadly stable shipment volumes, organic net revenue growth of 5-7%, organic operating income growth of 7-9%, and continued organic margin expansion.
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❖❖ CACI International (CACI) reported solid results for its fiscal Q3 2026, with broad-based growth across its national security technology portfolio. Revenues rose 8.5% year-over-year (6.8% organically) to $2.35 billion, broadly in line with the consensus. Meanwhile, adjusted diluted EPS jumped 16.7% to $7.27, well above the expectations of $6.95. EBITDA came in at $289.7 million, with margin expanding 60 basis points to 12.3% despite absorbing $17.4 million in acquisition-related transaction costs. Free cash flow reached $221 million, up 17.8% year-over-year.
Growth was led by the technology segment, which rose 11.2% and now accounts for over 56% of total revenue, reflecting CACI’s ongoing shift toward higher-value, software-defined capabilities. The DoD remained the dominant customer at 55% of revenues, growing 9.7%, with the Intelligence Community and federal civilian agencies also contributing solid gains.
The quarter’s defining event was the closing of the $2.6 billion all-cash acquisition of ARKA Group, which adds space-based electro-optical and infrared sensing, hyperspectral imaging, and agentic AI capabilities for classified environments – directly complementing CACI’s existing signals intelligence and electronic warfare portfolio.
The company won $2.2 billion of awards over the quarter, while achieving a trailing twelve-month book-to-bill of 1.2x. Total backlog reached $33.4 billion, up 6.4% year-over-year, with funded backlog surging 19%. Notably, 98% of FY26 revenue is already secured through existing contracts and backlog, providing unusual visibility for the remainder of the year.
Looking ahead, CACI raised its FY26 revenue guidance to $9.5-9.6 billion – with the increase primarily reflecting ARKA’s contribution of approximately $150 million in space and AI-related revenues – and lifted its EBITDA margin outlook to 11.8-11.9%, reflecting stronger organic performance. On the earnings line, adjusted EPS guidance was trimmed to $27.70-28.38 from $28.25-28.92, a modest near-term dilution from ARKA-related transaction costs, incremental amortization, and higher interest expense; the acquisition is expected to turn EPS-accretive in FY28. Full-year free cash flow guidance of at least $725 million was reaffirmed. On the technology front, CACI also announced AWS Managed Service Provider status, reinforcing its hybrid cloud credentials for defense and intelligence work as classified cloud adoption accelerates.
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Portfolio Stocks Under Review
❖ We are keeping Oracle (ORCL) under review, as the investment case continues to evolve on the back of AI-driven catalysts while investor sentiment remains fragile.
Oracle’s accelerating execution across AI applications and enterprise software remains at the core of the bull thesis. The company continues to expand its agentic AI ecosystem across finance, supply chain, HR, customer experience, and corporate banking, while pushing deeper into autonomous enterprise workflows. This shift from assistive tools toward systems that execute decisions and processes reinforces ORCL’s positioning as a central layer in enterprise operations, not just a software provider. The scale of this push is also becoming clearer, with Oracle now deploying hundreds of specialized AI agents across its Fusion platform, signaling a structural shift in how enterprise software is delivered and monetized.
On the infrastructure side, Oracle continues to move aggressively to secure scale. The previously announced Michigan data center tied to its AI buildout has now secured $16 billion in financing, marking a transition from planning to execution. At the same time, Project Jupiter in New Mexico continues to advance, with updated designs centered around Bloom Energy fuel cells and large-scale microgrid deployment, reinforcing ORCL’s strategy of securing power supply as a core competitive advantage.
The multicloud strategy is also expanding meaningfully. Following the AWS interconnect announcement, Oracle extended its partnership with Google Cloud, further embedding its AI database and workloads across external platforms. This reinforces a clear shift toward a platform-agnostic model, where ORCL positions itself as the data and infrastructure layer across clouds rather than competing directly with hyperscalers. Strategically, this reduces customer friction, broadens Oracle’s addressable market, and strengthens its role in AI workloads that increasingly span multiple environments.
The broader narrative continues to be anchored by Oracle’s ~$553 billion remaining performance obligations backlog, which provides strong visibility into future demand and supports the case that capacity expansion is tied to contracted workloads rather than speculative investment. At the same time, the closing of large-scale financing transactions and continued infrastructure buildout provide increasing evidence that the company is executing on this backlog in a tangible way.
That said, the financing side of the story remains a point of tension. Reports that large-scale data center debt tied to Oracle is testing bank balance sheets, alongside estimates of more than $100 billion in additional funding needs over the coming years, highlight the scale and complexity of the company’s investment cycle. This keeps investor focus on funding durability, capital discipline, and execution risk.
The latest concerns around OpenAI missing internal growth and revenue targets add another layer of uncertainty, but the read-through to Oracle is not straightforward. While this raises questions around the pace of demand and funding for large-scale compute contracts, the underlying signal appears more about normalization and intensifying competition across AI platforms than a collapse in usage. Importantly, ORCL today is far less of a single-customer story than it was just a year ago, with growing exposure across hyperscaler partnerships, enterprise workloads, and government demand.
However, the scale of Oracle’s commitments, particularly through its Stargate tie-up and broader AI infrastructure buildout, means that partner dynamics and funding conditions remain critical. Even if long-term demand remains intact, any reassessment at the partner level can influence deployment timelines and reinforce investor caution.
All in all, the fundamental story continues to improve, supported by strong backlog visibility, expanding multicloud relevance, and clear execution across both infrastructure and applications. However, sentiment remains sensitive to both financing concerns and external signals around AI demand. The continued fragility in investor confidence is why we are keeping ORCL under review for now.
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Portfolio Earnings and Dividend Calendar
❖ The Q1 2026 earnings season is in its busiest stretch, and many Smart Investor Portfolio holdings are scheduled to reveal their results in the coming week. Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), ASE Technology (ASX), Flowserve (FLS), EMCOR Group (EME), and Amphenol (APH) will report today, while Parker Hannifin (PH), ATI (ATI), Labcorp Holdings (LH), APi Group (APG), MasTec (MTZ), and SPX Technologies (SPXC) and are all scheduled for April 30. Additionally, nVent Electric (NVT) is expected to report on May 1, Sterling Infrastructure (STRL) on May 4, Arista Networks (ANET) and Pfizer (PFE) on May 5, and Regal Rexnord (RRX) on May 6.
❖ The ex-dividend date for Morgan Stanley (MS) and Citizens Financial (CFG) is April 30, while for Citigroup (C) it is May 4.
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New Buy: Energy Transfer (ET)
Energy Transfer LP sits at the core of the U.S. energy infrastructure system, operating one of the largest and most diversified networks of pipelines, storage facilities, and export terminals across natural gas, crude oil, and natural gas liquids. Its assets connect key production basins to demand centers, refineries, and global markets, enabling the continuous flow of energy that underpins industrial activity, power generation, and international trade. The partnership’s integrated platform spans gathering, processing, transportation, and export, positioning it as a critical link between upstream producers and end users. As energy demand evolves and export capacity becomes increasingly strategic, Energy Transfer plays a central role in moving, balancing, and monetizing hydrocarbons across North America and beyond.
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Transfer of Power
Energy Transfer’s story begins in 1996 as a small Texas-based pipeline operator, focused primarily on intrastate natural gas transportation. For much of its early history, growth came through a steady buildout of pipeline networks and a series of acquisitions that expanded its footprint across key U.S. basins. The turning point came in the 2010s, when a wave of large-scale deals – including Southern Union, Sunoco, and Regency Energy Partners – transformed the partnership from a regional operator into a fully integrated midstream platform spanning natural gas, crude oil, and natural gas liquids (NGL). That transformation culminated in the 2018 simplification, which consolidated Energy Transfer Equity and Energy Transfer Partners into a single structure, streamlining governance and aligning cash flows under the current ET entity. By the end of last decade, ET had assembled one of the most extensive energy infrastructure systems in North America.
The past five years have been less about expansion at any cost and more about refining that scale into a more disciplined, cash-generative platform. Following a period of elevated leverage tied to its earlier acquisition cycle, management shifted focus toward balance sheet repair, capital discipline, and simplification. Debt reduction became a priority, supported by stronger operating cash flow and a more measured approach to new projects.
At the same time, Energy Transfer has remained active on the growth front, executing targeted acquisitions that expand its footprint in core basins. The 2020 acquisition of Enable Midstream strengthened its natural gas gathering and transportation position, while more recent deals – including Lotus Midstream, Crestwood Equity Partners, and WTG Midstream – have deepened its presence in the Permian and adjacent regions, reinforcing scale and connectivity across its system.
In parallel, the partnership has continued to invest in high-return infrastructure tied to structural demand. Expansion of its natural gas and NGL pipeline systems – particularly out of the Permian Basin – has reinforced its position in one of the fastest-growing production regions in North America. On the export side, Energy Transfer has built out significant natural gas liquids export capacity at Nederland and expanded its Gulf Coast terminal network, positioning it to capture growing international demand for U.S. hydrocarbons.
Ownership stakes have also broadened its reach beyond the core system. ET holds a controlling interest in Sunoco LP, providing exposure to fuel distribution, and a significant interest in USA Compression Partners, extending into natural gas compression services – complementary businesses that contribute cash flow without being fully integrated into the partnership’s pipeline and terminal network.
What defines Energy Transfer today is the shift from rapid consolidation to operational leverage. The company has moved from building a network to optimizing it – focusing on throughput, connectivity, and export capability – aligning its vast asset base with long-term trends in U.S. production growth and global energy demand.
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Full Stream Ahead
Energy Transfer operates as the connective tissue of the U.S. energy system – moving, processing, storing, and ultimately delivering hydrocarbons to where demand is forming. Its roughly 140,000-mile pipeline system connects oil and gas basins like the Permian to power plants, refineries, storage sites, and export terminals, forming one of the largest energy logistics networks in the country.
What makes the business durable is not just its size, but how much of the journey it controls. In many cases, ET handles energy from the moment it leaves the well, moves it across long-distance pipelines, and then delivers it into storage facilities or export terminals. This allows Energy Transfer to monetize multiple services along a molecule’s path, earning fees at different stages such as transportation, processing, and delivery.
The system is deliberately diversified. About 40% of earnings come from natural gas infrastructure, with the rest spread across NGLs, crude oil, and refined products. This balance allows the company to benefit from different demand drivers at the same time – from domestic fuel consumption to global exports.
Exports have become a central part of the story. Facilities such as Nederland in Texas and Marcus Hook in Pennsylvania allow Energy Transfer to ship large volumes of U.S. energy overseas, particularly natural gas liquids used in petrochemicals and manufacturing. As global demand shifts toward more stable and secure supply sources – particularly from the U.S. – these export hubs are becoming more important and increasingly difficult to replicate, given the cost and permitting required to build new infrastructure.
The next phase of growth is increasingly tied to domestic demand, especially electricity. Natural gas is a key fuel for power generation, and Energy Transfer is expanding its pipeline network to supply utilities and large industrial users. A newer and fast-growing source of long-duration demand is data centers, which require massive and constant amounts of electricity. The company has signed long-term agreements with companies such as Oracle, alongside additional contracts and negotiations with other data center developers, supplying natural gas to facilities that generate the electricity powering AI and cloud computing.
This shift changes how the business grows. Oil and gas producers still supply the volumes that flow through ET’s system, but demand is increasingly being shaped by the end users – power plants, export facilities, and large industrial consumers – that ultimately use that energy. By signing long-term agreements tied to these demand sources, the company is anchoring more of its pipeline capacity to real-world consumption. These contracts can last close to two decades and provide more predictable, stable revenue because they are linked to electricity generation, exports, and industrial activity, rather than short-term production decisions.
Energy Transfer’s forward strategy is centered around expanding and optimizing its vast existing network. Incremental volumes, new laterals, and asset repurposing are layered onto a system that is difficult to replicate – constrained by cost, regulation, and geography. By adding connections, increasing capacity, and routing more energy through its system, ET can grow alongside evolving demand: from moving molecules out of the ground to delivering them into the systems that power the next phase of economic activity.
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Flow Mechanics
Energy Transfer’s financial profile reflects a business built on scale, contracts, and steady throughput – with growth driven less by price swings and more by how much volume moves through its system.
The momentum carried through 2025. Full-year adjusted EBITDA reached roughly $16 billion, up about 3% year-over-year, marking a new high for the partnership, while fourth-quarter EBITDA rose to about $4.2 billion, an increase of nearly 8%. Revenue for the year totaled approximately $85.5 billion, supported by record volumes across crude, natural gas liquids, and gas transportation. Distributable cash flow – the cash available to pay unitholder distributions after operating costs and maintenance spending – came in at around $8.2 billion, slightly below the prior year’s ~$8.4 billion despite higher EBITDA, reflecting higher capital spending and financing costs.
Earnings are spread across the system’s main flows: natural gas transportation and storage contribute roughly 40% of EBITDA, with the rest coming from natural gas liquids, crude oil transportation, and related services such as processing and export. In the fourth quarter, NGL and refined products generated about $1.1 billion of EBITDA, while crude and midstream activities each contributed just over $700 million, and gas-related operations filled out the balance. The structure is intentionally diversified, so no single commodity or flow dominates results.
What anchors the model is its long-term, fee-based agreements with customers. Roughly 90% of earnings come from fixed fees tied to moving, handling, or storing energy, with only a limited portion exposed to commodity prices. In practice, this means ET gets paid as volumes move through its system – sometimes at multiple points along the route – whether prices are high or low. As utilization rises and more connections are added, more molecules pass through the network, and each additional unit flows through a largely fixed network, adding revenue without a matching increase in cost.
That dynamic does not eliminate the need for investment – it shifts where capital is deployed. Growth capex remains elevated at about $4.5 billion in 2025 and is expected to rise to $5.0-5.5 billion in 2026, with roughly two-thirds directed toward natural gas projects and about a quarter toward NGL infrastructure. These investments are largely backed by long-term agreements and are expected to generate mid-teen returns, supporting management’s guidance for 2026 adjusted EBITDA of $17.45-17.85 billion.
The balance sheet reflects this expansion phase. Debt stands at roughly $70 billion, with leverage targeted at 4.0-4.5x EBITDA and an investment-grade rating maintained in the BBB range. An annual interest expense of about $3.4 billion, combined with ongoing refinancing needs, means the company is more sensitive to interest rates and financing conditions than to commodity price swings – a key distinction for a company often viewed through an energy lens.
Short-term results can still fluctuate. Hedging timing, weather-related disruptions, and regional pricing dynamics introduced noise in 2025, while certain areas – particularly crude transportation and NGL services – faced localized pressure from lower volumes or rising competition. These factors affect timing and margins, but they do not fundamentally change the volume-driven nature of the business.
Energy Transfer’s financial model is straightforward at its core: move more volume through a largely fixed network, earn fees at multiple points along the way, and expand capacity where long-term demand is already visible. Execution now centers on how efficiently capital is deployed to convert that demand into earnings growth.
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Pipe and Circumstance
Energy Transfer is best compared to a focused group of large U.S. midstream operators – spanning both MLPs and C-Corps – that move, store, and process hydrocarbons across national infrastructure networks, where scale, asset integration, and contract-backed cash flows define competitive positioning. Enterprise Products Partners (EPD) offers the closest comparison, sharing a similarly diversified, fully integrated system and serving as the primary benchmark for balance sheet strength and capital discipline. Kinder Morgan provides a natural contrast through its C-corporation structure and heavier tilt toward natural gas pipelines, positioning it closer to a more utility-like model with broad gas exposure and a different investor base. Williams sits at the more focused end of the spectrum, with a predominantly natural gas network tied to LNG and power demand. MPLX rounds out the group as a high-efficiency MLP with strong margins and a logistics- and gathering-oriented footprint, offering a useful comparison for yield and cash flow execution. Together, these peers frame Energy Transfer as a hybrid within the group – combining scale and integration comparable to EPD with a capital-intensive growth profile that sits between the most conservative and more specialized models.
All these stocks are up over the past year, but the differences have been meaningful. Energy Transfer gained roughly 10%, trailing peers like EPD and Williams with 20%+ increases, and Kinder Morgan, which delivered mid-teens returns, while MPLX lagged. The gap reflects less a divergence in fundamentals and more a divergence in perception. Energy Transfer continues to trade with a residual discount tied to its higher leverage and capital-intensive growth cycle, even as volumes and earnings reached record levels. At the same time, investors have favored cleaner stories – EPD for balance sheet discipline and WMB for direct exposure to natural gas and power demand. ET participated in the sector tailwinds, but without the same re-rating, leaving performance solid, though not leading. However, its more modest share price gain, despite expected earnings growth acceleration, suggests meaningful upside potential, supported by its relatively moderate valuation.
Energy Transfer’s valuation sits toward the lower end of the large-cap midstream range, particularly on EV/EBITDA and price-to-cash-flow, where it trades below peers like EPD and well below premium names such as Williams. On a forward EV/EBITDA basis, ET is around the high-single-digit range, compared to low-teens for EPD and mid-teens for Williams, reflecting a persistent discount. That gap is not driven by weaker growth. ET’s forward EBITDA growth, supported by its current capital program and rising natural gas demand, is broadly in line with or above most of its peers. Instead, the discount reflects its higher leverage and more capital-intensive profile. At the same time, ET’s valuation implies limited credit for that growth. With a forward PEG broadly in line with peers and strong volume-driven expansion, its multiples sit at the lower end of the spectrum – suggesting the market is pricing in risk more than growth, leaving room for re-rating as execution continues.
Unlike traditional dividend stocks, Energy Transfer’s total return is built around distributions, which function differently from standard payouts. The partnership’s distributions are well covered, with distributable cash flow exceeding payouts by roughly 1.8x, providing both downside protection and capacity for growth. In fact, ET has just announced its latest increase of 3%, bringing the quarterly distribution to $0.3375, or about $1.35 annually, implying a yield near 7%.
A meaningful portion of this cash is typically treated as return of capital, deferring taxes rather than generating immediate income – a structural feature of MLPs that enhances after-tax yield but adds complexity. In practice, this makes ET an income-first investment: a large share of total return comes from cash distributions, with price appreciation acting as a secondary, though increasingly relevant, component as earnings grow.
Over the past year, this combination has produced a total return of roughly 18% – solid in absolute terms, though still trailing peers such as EPD and Williams. The key difference is that a larger portion of ET’s return has come from income rather than multiple expansion. With strong distribution coverage and visible EBITDA growth from its project backlog, incremental cash generation is building beneath the surface. As the company continues to integrate recent acquisitions and potentially moves leverage toward the lower end of its target range, the market may begin to reward ET with greater valuation recognition, similar to what EPD experienced over the past year.
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Investing Takeaway
Energy Transfer is moving beyond its legacy perception as a scale-driven midstream operator toward a more structured, demand-linked infrastructure platform embedded in how energy is produced, moved, and ultimately consumed. Its strength lies in the breadth of its network and the ability to connect supply with emerging sources of long-duration demand, particularly in power generation and industrial use. As capital deployment becomes more disciplined and recent expansions begin to translate into steady cash generation, the business is shifting toward a more predictable, execution-led model. The underlying drivers – rising natural gas demand, export growth, and increasing electricity needs – provide a durable foundation. With improving financial clarity and a clearer link between growth and outcomes, Energy Transfer is positioning itself for a more consistent and recognized role within the sector.
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Smart Investor’s Winners Club
The Winners Club represents stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Markets went on a rollercoaster ride, notching record highs only to be knocked down the next day. Despite the volatility, the Club’s ranks held, still counting 24 stocks:
AVGO, GE, ANET, TSM, EME, HWM, APH, VRT, IBKR, MTZ, PH, GOOGL, ORCL, ASX, KEYS, JBL, BK, ATI, CSCO, MS, STRL, CRWD, RTX, and C.
The first runner-up is still JPM with a 27.32% gain since purchase. Will it return to the ranks, or will another stock outrun it to the finish line?
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