Pipeline and midstream energy stocks have had a strong start to 2024. This can been seen in the performance of major sector exchange-traded funds (ETFs) such as the Alerian Energy Infrastructure ETF (NYSEMKT: ENFR) , up about 18% year to date, and the Alerian MLP ETF (NYSEMKT: AMLP) , up nearly 17%. The latter only includes the stocks of midstream companies structured as master limited partnerships (MLPs) , while the former includes midstream companies structured as both MLPs and corporations.

While the first half of the year has been a good one for the sector, there is strong reason to believe a number of stocks in the space could be set to outperform in the second half and beyond.

Lets look at three midstream stocks set to outperform the rest of this year and into the future.

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MPLX

MPLX (NYSE: MPLX) is a midstream company involved in logistics and storage as well as gathering and processing (G&P). Refiner Marathon Petroleum owns approximately 65% of the company and represents just under 50% of its revenue.

The stock sports an attractive 8% yield based on its most recent distribution and had a robust 1.6 times coverage ratio in the first quarter of 2024. Meanwhile, its balance sheet is in good shape with a leverage ratio (net debt/adjusted EBITDA ) of just 3.2 times. The company has been a consistent performer, raising its base distribution each year since 2012.

The company is well positioned in both Appalachia (Marcellus and Utica) and the Permian, and has a robust pipeline of growth projects in both regions over the next few years. It is planning to spend $950 million in growth capital expenditure (capex) this year. The company also recently acquired some G&P assets in the Utica and entered into an agreement to merge the Whistler Pipeline and Rio Bravo Pipeline projects into a new joint venture in order to link Permian supply to additional Gulf Coast demand, which it believes will lead to future growth opportunities. <

Situated in the right basins, MPLX looks in good shape to continue growing its distributions, while its forward enterprise value (EV) -to-EBITDA (earnings before interest, taxes, depreciation, and amortization) valuation of 9.6 times (one of the most common ways to value midstream stocks) is attractive and well below the 13.7 times multiple the sector traded at between 2011 to 2016.

MPLX EV to EBITDA (Forward) data by YCharts

Western Midstream

One of the best-performing midstream stocks in the first half of the year was Western Midstream (NYSE: WES) , which was up around 35%. The company primarily services Occidental Petroleum 's gathering and processing (G&P) needs in the Delaware Permian, Powder River Basin (PRB), and Denver-Julesburg (DJ) basins.

The company started the year strong, recording record Q1 adjusted EBITDA of $609 million that was up 22%, while its free cash flow soared 60% to $225 million. This prompted Western to say it expected its adjusted EBITDA to come in at the high end of its previous guidance calling for full-year adjusted EBITDA of between $2.2 billion and $2.4 billion.

Impressively, the company increased its quarterly distribution by 52% from $0.575 per unit to $0.875. Based on this distribution, the stock now yields about 8.9%. Western appears on track to reach its leverage (net debt/adjusted EBITDA) goal of 3 times by year end, at which point it could pay out excess (special or variable) distributions above its current $0.875 quarterly based payout. That would likely help propel the stock even higher and set it up to continue to outperform.

Meanwhile, with a forward EV-to-EBITDA valuation of 9.6 times, the stock is trading at an attractive valuation that is well below historical levels.

WES EV to EBITDA (Forward) data by YCharts

Energy Transfer (ET)

One of the stocks best positioned to benefit from increasing power consumption stemming from artificial intelligence (AI), meanwhile, is Energy Transfer (NYSE: ET) . The company has the largest integrated midstream system in the country with strong positions in low-cost natural gas-producing regions, particularly the Permian. As primarily a prolific oil-producing basin, the associated natural gas that comes from production in the Permian is some of the cheapest in the country, which is likely to draw many new data centers to the region given the immense energy that is needed to power AI.

Energy Transfer already has one of the most robust growth-project backlogs in the midstream space, with the company expecting to spend nearly $3 billion in growth capex this year. Projects related to AI energy consumption are only likely to increase that backlog in the future.

At the same time, the company has repaired its balance sheet to nicely lower its leverage, while carrying a high distribution-coverage ratio of over 2 times last quarter.

Trading at a forward EV/EBITDA ratio of just 7.4 times, Energy Transfer is a cheap stock with a lot of potential growth in front of it. That's why it is my favorite midstream stock to outperform in the second half of 2024 and beyond.

ET EV to EBITDA (Forward) data by YCharts

Geoffrey Seiler has positions in Alps ETF Trust-Alerian Mlp ETF, Energy Transfer, and Western Midstream Partners. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy .