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The companies of the Energy Transfer Equity (ETE 1.36%) are all sporting some pretty impressive yields. Today, its shares and those of its subsidiary partnerships -- Energy Transfer Partners (ETP +0.00%), Sunoco Logistics Partners (NYSE: SXL), and Sunoco (SUN +0.68%) -- all have dividend yields greater than 6%. Before you jump on one of these companies and wait for the dividend checks to come streaming in, though, you should know this: These payouts don't look like they can last much longer in their current states. Here's why all four of Energy Transfer's corporate entities could be headed for a dividend cut soon.
Too much debt
Energy Transfer Equity may have dodged a debt bullet by getting out of the acquisition of Williams Companies, but it is still flirting with dangerously high debt levels. The problem isn't just unique to Energy Transfer Equity, though. The debt loads for all of its subsidiaries are all on the very high side, too. Even for an industry that is a little more tolerant of debt than others. Just to give a point of reference, I have also included the debt metrics for other master limited partnerships that have a much more manageable debt loads.
| Company | Net Debt to EBITDA | Interest Expense to EBITDA |
|---|---|---|
| Energy Transfer Equity | 7.87x | 2.54x |
| Energy Transfer Partners | 6.62x | 2.90x |
| Sunoco Logistics Partners | 6.08x | 6.58x |
| Sunoco LP | 7.13x | 4.07x |
| Enterprise Products Partners | 4.71x | 4.98x |
| Spectra Energy Partners | 4.03x | 6.88x |
| Magellan Midstream Partners | 3.51x | 7.18x |
Data source: S&P Global Market Intelligence.
Too much spending
Having a high debt load might be OK if the companies under the Energy Transfer umbrella weren't spending much on growth and were instead focused on debt management or were generating excess cash from operations that could be invested back into the business. Unfortunately, this isn't the case today. All of the companies are currently on the hook for some large capital projects that will require some funding source.
- Energy Transfer Partners by itself has more than $10 billion in projects to pay for between now and 2018.
- The Lake Charles LNG facility, co-owned by Energy Transfer Equity and Energy Transfer Partners, comes with a price tag of $10.9 billion.
- Sunoco Logistics was slated to spend $2.5 billion in 2016 until it sold its stake in a pipeline to Energy Transfer Partners; it now only expects to spend $1.6 billion this year.
- Sunoco LP probably has the lowest scheduled capital spending program, but much of the company's further growth will come from acquisitions rather than organic spending.
With this much spending scheduled to happen in the next couple of years, all of the companies here will need a lot of capital that they simply don't have on hand or will be able to fund with internal cash flows because they are too busy doling them out to shareholders.
For a master limited partnership, the best way to determine its ability to retain cash for growth is the distribution coverage ratio, this is the amount of cash that is theoretically available to be distributed divided by the actual amount distributed every quarter. For Energy Transfer Equity, this metric looks pretty good, the only problem is that all of its subsidiaries are paying out more than what is coming in the door.
| Company | Distribution Coverage Ratio* |
|---|---|
| Energy Transfer Equity | 1.15x |
| Energy Transfer Partners | 0.91x |
| Sunoco Logistics Partners | 0.8x |
| Sunoco LP | 0.93x |
Data source: Company earnings releases. * Most recent quarter.
All of Energy Transfer's profits come from its ownership stakes in these three partnerships and the distributions they pay. By the looks of things, all three of these payouts are on shaky ground and are at risk of being cut. This, by default, would force Energy Transfer Equity to descrease its payout as well.
So, we have three companies that want to spend a lot of money on new projects, but no one is generating any cash flow to pay for those projects and they are already up to their ears in debt. The only way to reasonably pay for projects would be to issue shares or sell off other assets in other parts of the business. With high yields already, issuing shares would be a prohibitively expensive option. That pretty much leaves only one choice: cut the payouts first, raise a little through equity, and then use the cash freed up from the payout cuts to fund projects internally.
What a Fool believes
The companies under the Energy Transfer umbrella have painted themselves into a corner with its high payout, massive spending plans, and high debt levels. These three factors suggest that the chance of a payout cut in the future is pretty likely. If you are tempted by the high yields of any of the companies that are part of the Energy Transfer empire, you may want to think twice.
