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This year has been rather tumultuous for Energy Transfer Partners (ETP +0.00%). The midstream company's unit price plunged early on due to some turmoil at its parent company Energy Transfer Equity (ETE +0.52%), only to surge back to even. That said, the partnership has had problems of its own, and those are what investors ought to focus their attention on this week when it reports third-quarter results. Here are three things to look for.
1. What's the over/under on a completion date for the Dakota Access Pipeline?
Energy Transfer Partners is in the midst of an ambitious $15 billion expansion. The largest project within it is the $4.8 billion Bakken Crude Pipeline, which it initially expected to be in service by the end of this year. However, construction of the pipeline, better known as the Dakota Access Pipeline, has come under intense opposition over one segment of the route, which takes it across lands ceded by U.S. treaty to the Standing Rock Sioux tribe, who are extremely concerned about the environmental hazards. Because of that, President Obama has floated the idea of rerouting the pipeline away from tribal lands, which could further delay the project.
The construction delays that have resulted from the protests by the tribe and like-minded environmentalists have been a blow to Energy Transfer and its partners, who were hoping to start seeing cash flow from the project during the fourth quarter. Further, Energy Transfer has a deal in place to sell a minority stake in the project for $1.2 billion, which would give it cash to pay down debt and help fund other growth projects. Because of how important this project is to the company, investors will want to see what executives have to say about it this quarter -- especially their views of when it is expected to go into service.
2. Did rising commodity prices give the midstream segment a boost?
The bulk of Energy Transfer Partners' earnings comes from fee-based pipelines, which are relatively immune to commodity price volatility. Despite this, the company is not completely immune to the currently weak oil and gas market, as is evidenced by the fact that adjusted EBITDA in the first half of 2016 decreased 3% versus the year-ago period, while distributable cash flow was down 13%. Driving these declines were weaker earnings across several segments:
Data source: Energy Transfer Partners. Chart by author. NOTE: In millions of dollars.
While retail marketing profits are down more than 50% over the past year, that is because Energy Transfer Partners sold its retail marketing assets to affiliated MLP Sunoco LP (SUN 1.05%) and traded its general partner interest and incentive distribution rights in Sunoco LP to Energy Transfer Equity. That leaves the midstream segment as the prominent underperformer, struggling due to weaker volumes in the Mid-Continent and North Texas regions, as well as the impact of low oil and gas prices on its non fee-based contracts.
Given that commodity prices improved during the third quarter, investors will want to see if this segment's earnings improved as well.
3. Is the distribution coverage ratio improving?
These same factors have weighed down Energy Transfer Partners' distributable cash flow. As a result of this weaker cash flow, and a decision to maintain its distribution at previous levels, the company has paid out more than it earned this year. This shortfall is apparent by looking at the distribution coverage ratio, which was just 0.91 times last quarter and 0.89 times for through the first half. Worse yet, the company came up short despite the fact that Energy Transfer Equity stepped in to provide support by relinquishing a growing supply of its incentive distribution rights (IDRs).
Needless to say, investors want to see this number improve closer 1.0 times. That could have happened during the third quarter, because not only did Energy Transfer Equity relinquish an additional $10 million of IDRs during the quarter, but Energy Transfer Partners recently completed two growth projects, which will supply incremental cash flow during the quarter.
Investor takeaway
Energy Transfer Partners has had its share of problems this year, each of which investors hope will shortly be in the rear-view mirror. Its third-quarter report will give us a better idea of how much progress the company has made, and how much more work it has to do.
