Energy Transfer's 6.3% Yield: Can It Survive the Next Oil Crash?

The risk of another energy downturn hangs over Energy Transfer's 6.3% distribution yield. The master limited partnership cut its payout in half during the 2020 oil collapse, when crude futures briefly went negative. Now, with debt reduced and cash flow covering the distribution by more than double, the question is whether the repairs are enough.

Energy Transfer paid out $0.305 per unit in the second quarter. Distributable cash flow covered that by 2.2x, the company reported. That is a wide margin. The coverage ratio means the MLP could absorb a 50% drop in cash flow and still pay the distribution. Debt-to-EBITDA fell to 4.1x at mid-2026 from a peak of 5.4x at the end of 2020, according to its filings.

Analyst Reuben Gregg Brewer, writing for The Motley Fool, said the 2020 cut was a strategic decision to strengthen the balance sheet. “Energy Transfer used the distribution cut to focus on strengthening its balance sheet,” Brewer wrote. The result is a “more financially sound and reliable business.”

The comparison with peer Enterprise Products Partners is instructive. Enterprise carries a lower debt ratio – 3.3x versus Energy Transfer's 4.1x – and has raised its distribution annually for 28 years. Its yield is 5.7%. Yet Energy Transfer's coverage is higher: 2.2x versus Enterprise's 1.9x. Enterprise is the safer pick for conservative income seekers. Energy Transfer offers more yield but comes with more complexity and leverage risk.

Energy Transfer controls two other publicly traded MLPs. That adds corporate layers and raises the risk of conflicts or cascading stress during a downturn. The company has also been more aggressive in its growth strategy, including the repurchase of units. Brewer said the higher yield relative to Enterprise “reflects a higher risk profile.”

What would confirm the risk of a distribution cut? A sustained drop in crude oil below $50 a barrel for more than a quarter. That would pressure throughput volumes and reduce fee-based revenue. Energy Transfer's cash flows depend more on volume moving through pipes and storage than on the price of the oil itself, but a deep recession would cut both. A weaker economy would also reduce natural gas demand, hitting its gathering and processing segment.

What would weaken the risk? Steady throughput and continued debt reduction. Energy Transfer has targeted 3% to 5% annual distribution growth. If the company meets that while keeping debt-to-EBITDA below 4.0x, the distribution looks durable. The next earnings report, due in late October, will show whether coverage remains above 2.0x and whether the debt ratio is still falling.

Exxon Mobil (Alpha Score 61, Moderate) and Chevron (Alpha Score 65, Moderate) have both warned that oil and gas prices do not fully reflect the supply risks from geopolitical tensions. That warning cuts both ways: it could mean prices stay elevated and Energy Transfer's volumes remain stable, or it could mean a sudden supply shock that rattles demand. For now, the company's fee-based model provides a buffer.

Brewer's conclusion: “The distribution is likely to survive the next energy downturn.” The coverage ratio and debt reduction support that view. For investors willing to accept some uncertainty, Energy Transfer's 6.3% yield offers a decent reward against manageable risk – provided crude does not revisit 2020 lows.