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Energy Transfer Partners (ETP +0.00%) is coming off of a tough year. That is evident by looking at its financial statements, which show that adjusted EBITDA is down 4.2% year to date versus the prior period, while distributable cash flow has fallen 9.8% thanks to weaker commodity prices and some other issues. That said, earnings and cash flow should recover nicely in 2017 thanks to several strategic initiatives the company has under way. These catalysts position the company to deliver its best year ever for earnings and cash flow in 2017.
Stronger together
The largest near-term catalyst for Energy Transfer Partners is its pending merger with oil pipeline sibling Sunoco Logistics Partners (NYSE: SXL). While Sunoco is technically the acquiring entity, that's merely a formality, because the combined company will retain the Energy Transfer moniker and senior management team. Instead, the driving force behind this deal is that it will significantly strengthen Energy Transfer by improving its balance sheet and other financial metrics.
In addition to that, one of the other benefits of the consolidation is an immediate boost in distributable cash flow. For example, Energy Transfer's consolidated cash flow totaled $2.6 billion thus far in 2016 because it included Sunoco Logistics' $696 million in distributable cash flow. However, after adjusting that against distributions received for its ownership interest in the entity, Energy Transfer's actual distributable cash flow was $2.3 billion, which is roughly $100 million less on a quarterly basis. As such, this transaction stands to boost the combined entity's distributable cash flow by approximately $400 million in 2017.
A full year of the latest additions
The combined company also stands to benefit from a full year of Energy Transfer's acquisition of a 65% stake in PennTex Midstream Partners (NASDAQ: PTXP) in late October. Energy Transfer paid a total of $640 million for that stake, which includes 6.3 million common units, 20 million subordinated units, 100% of PennTex Midstream Partners' general partner, and all of the incentive distribution rights. During the third quarter, Energy Transfer was able to book $8 million in distributable cash flow because of an upcoming distribution to PennTex's common and subordinated unitholders. However, that income level will be higher on a go-forward basis once it also starts receiving the lucrative incentive distribution rights.
Meanwhile, Sunoco Logistics completed two acquisitions in 2016. In September, the company acquired Vitol's Permian Basin crude oil system for approximately $760 million. Then in November, the company completed a strategic joint venture with oil giant ExxonMobil (XOM 4.00%) to combine their critical oil logistics assets in the Permian Basin. These deals will provide incremental earnings that will show up over the course of 2017.
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The pipeline is nearing completion
In addition to these acquisitions, both Energy Transfer and Sunoco Logistics have several organic growth projects nearing completion. Topping that list is their controversial $4.8 billion Bakken pipeline system, which is more than 85% finished. While progress on the project stalled because of a permit issue, the company should get the necessary approvals early next year.
That said, this project is just one of several these companies still have in the pipeline as Energy Transfer puts the finishing touches on a massive $15 billion expansion phase in 2017. In the year ahead, the company should complete work on the Trans-Pecos and Comanche Trail Pipelines, the Rover Pipeline, and the Revolution System, while Sunoco Logistics expects to finish its Mariner East 2 project. While many of these projects will not go into service or start generating cash flow until the second half of the year, they will still provide a lift in 2017. That's on top of the full-year benefit from a slew of projects both companies completed in 2016.
Overall, Energy Transfer estimates that its growth projects will deliver a 6-8 times EBITDA multiple on the capital employed in the first year. Given that it anticipates investing $10 billion for its share of these projects, this backlog represents a run rate of $700 million in annual EBITDA once all of the projects go into service. While it will not feel the full impact of that growth until 2018, these projects will still supply meaningful growth in 2017.
Investor takeaway
In many ways, 2017 will be a transformational year for Energy Transfer Partners. Not only should it complete a merger with Sunoco Logistics, but it expects to finish the last of its major expansion projects. These growth initiatives, plus the full-year benefit of recent third-party acquisitions and an improving oil market, should reverse 2016's slide and could push EBITDA and distributable cash flow to new records. As such, the company should enjoy its best financial year ever as long as everything goes according to plan.
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