AI energy demand makes Energy Transfer a buy: Strategist

As global conflict and OPEC+ price cuts drive oil prices higher (BZ=F, CL=F), the latest edition of Good Buy or Goodbye with Tortoise Senior Portfolio Manager Rob Thummel offers investors the energy sector playbook.

Thummel rates Energy Transfer (ET) as his "good buy," citing the company's ample free cash flow and reliable dividend yield of over 8%. Energy transfer also operates infrastructure that is critical for meeting AI energy demand. Halliburton (HAL) earns Thummel's "goodbye," claiming its capital expenditure will decline, in turn lowering demand for its services. The current share price is trading at a premium, he adds, and the company has a lower dividend and cash flow yield when compared to Energy Transfer.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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JOSH LIPTON: It's a big, noisy universe of stocks out there. Welcome to Good Buy or Goodbye. Our goal, to help cut through that noise to help navigate the best moves for your portfolio. And today, we're going to be focusing in on the energy sector, specifically infrastructure plays and producers as global conflicts and OPEC plus cuts drive oil prices higher and expectations we're going to need more energy in this new age of AI. What's the best way to play it? Well, here now with that answer is Rob Thummel, Tortoise Senior Portfolio Manager. Rob, it is always good to see you.

ROB THUMMEL: Thanks for having me.

JOSH LIPTON: All right. So let's start here, Rob, with you pick, your buy. And that's going to be Energy Transfer. A few different reasons for this, Rob, you would lay out. And your first point here, predictable cash flows and dividend. Explain that one.

ROB THUMMEL: Yeah. So Energy Transfer is a classic energy infrastructure stock. One of the great things about energy infrastructure, lots of cash flow, lots of free cash flow. In Energy Transfer's case, it's got an 8.5% dividend yield. You can't find a lot of 8.5% dividend yields in any stocks. And Energy Transfer is actually an investment grade-rated company. So we really like the stock for investors. I think the dividend yield by itself is compelling.

JOSH LIPTON: Let's look at another key point here you make, operates essential infrastructure. Rob, elaborate on that for us.

ROB THUMMEL: Yeah. So operating essential infrastructure, what does that mean? Well, Warren Buffett talks about an economic moat. If you think about infrastructure and how important it is, infrastructure really is the key to anything. It's the key to everything for global economic growth and population growth. You're going to need more energy.

And that economic moat that Energy Transfer have is basically its pipeline network. It's really irreplaceable. It's more difficult to expand. And you'd have to spend a lot more money to replace the existing pipeline network that Energy Transfer really operates now if you tried to replicate that going forward.

JOSH LIPTON: Got it. A third point here, this got my attention, Rob. You would argue to viewers here this is actually an AI play.

ROB THUMMEL: Yeah. Well, if you go backwards, if you think, what really drives AI? Well, you need a lot more computing power, you need a lot more electricity, you need reliable electricity 24 hours a day, seven days a week. What does that? Well, energy. Basically oil, natural gas. Natural gas in particular provides that reliable energy that AI needs. So there's no AI without EI or energy infrastructure.

JOSH LIPTON: Final point here on this one, Rob. You would point out to viewers, this is an investment grade-rated debt.

ROB THUMMEL: Yep. Investment grade-rated debt, once again, with an 8.5% dividend yield, it's an investment grade-rated company. There's really a mismatch between really the value of the company and its investment grade rating and the fact that it's got an 8.5% dividend yield. Those two just don't make sense together.

JOSH LIPTON: Rob, you made a very convincing case before the viewers are listening here. Maybe they want to pile in. What is the big risk they need to consider for this name?

ROB THUMMEL: Yeah. The biggest risk, Josh, is just a global recession, reducing demand for oil and gas basically. And we've seen that a couple times. But big picture, energy transfer just really charges a fee to move product through its pipelines. That's the predictable fee cash flow story. So if you have a global economic recession, then you're going to have less oil and gas, and that could impact the stock in general.

JOSH LIPTON: All right. So here, Energy Transfer is one to buy here, Rob. Let's move over to one you would avoid. That would be Halliburton. A few reasons for that as well. Let's run through them. One, you would point out capital expenditures expected to decline.

ROB THUMMEL: Yeah. So Halliburton is an oilfield services stock. So it really is subject to what happens in the oil and gas producer space. Oil and gas producers are reducing their capital expenditures, Josh. So that means the Halliburton's services are going to be needed less potentially going forward. And so that's one of the reasons why not to buy this stock.

JOSH LIPTON: Got it. Also, you would argue, Rob-- this is interesting-- valuation, in your opinion, not attractive at these levels.

ROB THUMMEL: That's right. So Halliburton itself trades at a premium. Well, on an enterprise value to EBITDA basis relative to ExxonMobil and Chevron. It trades at a higher valuation than Exxon and Chevron. And so from our perspective, we would probably be more interested in Exxon and Chevron, less interested in Halliburton at its current valuation.

JOSH LIPTON: Got it. Final point here I want to touch on, lower dividend, free cash flow yield.

ROB THUMMEL: Yeah. We just talked about the high dividend yield of Energy Transfer. Halliburton is on the opposite end. They've got a little over 1% dividend yield. So not really compelling and attractive relative to the broader market. Free cash flow yield, which is really a main attribute a lot of energy companies, Halliburton's free cash flow yield is significantly lower than other companies that you can really buy and find in the energy sector.

JOSH LIPTON: And finally, I'll end here, Rob, just as I did with Energy Transfer. What's the risk to your call with this name?

ROB THUMMEL: Yeah. Well, the risk here continues to be lower spending basically longer term. So Halliburton is really contingent upon-- and if we have lower commodity prices, that means lower capital spending, that means lower services and oilfield services needed. And then that will have a negative impact on Halliburton itself.

JOSH LIPTON: Got it, Rob. Let's wrap this up for viewers. So you're telling investors, listen, buy Energy Transfer, given its high cash flow. Essential infrastructure assets in AI energy demand. On the other side, you're saying avoid Halliburton due to its valuation and poor fundamentals. Thank you, Rob Thummel, for joining us today. And thank you for watching Good Buy or Goodbye. We'll be bringing you new episodes three times a week at 3:30 PM Eastern.