Last quarter was more of the same for Energy Transfer Partners (NYSE: ETP). Despite completing a consolidation transaction with Sunoco Logistics, the company's cash flow slipped again in the first quarter due to weakness in several of its segments. That said, with drilling activities on the rise and several expansion projects recently entering service, there's reason to be optimistic that the company's cash flow could finally start heading higher in the second quarter.

A quick look back

During the first quarter, Energy Transfer Partners reported $1.41 billion of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), which was up $2 million from the year-ago period. That said, distributable cash flow continued to decline, falling 4.5% versus last year to $907 million. Weighing on results was the weakness in both the company's interstate and intrastate transportation and storage segments as well as in its Sunoco Logistics investment:

A chart showing Energy Transfers' earnings by segment in the first quarter of 2017 and 2016.

Data source: Energy Transfer Partners. Chart by author. In millions of dollars.

As that chart shows, Sunoco Logistics's earnings were down last quarter. However, that was entirely due to the impact of last-in, first-out (LIFO) inventory accounting. If it wasn't for that impact, earnings would have increased due to the positive influence from several strategic growth initiatives. Meanwhile, both the interstate and intrastate segments declined due to lower volumes.

Just starting up

However, those volumes should start improving in the second quarter because several major growth projects recently entered service. In early May, the company noted that the Trans-Pecos Pipeline, Comanche Trail Pipeline, and the WAHA header had all entered service. These pipelines ship natural gas from Texas to Mexico under long-term contracts and should supply the company with steady earnings and cash flow for years to come.

In addition to that, the company's controversial Bakken Pipeline officially started commercial service in early June. While that was several months later than expected, the system is now generating cash flow for Energy Transfer and its joint venture partners. That said, given that late start, the system didn't move the needle for the system's co-owners during the quarter. For example, while Enbridge Energy Partners (NYSE:EEP) noted that the system was generating cash flow, its adjusted EBITDA slipped versus the year-ago period. It's worth pointing out, though, that Enbridge Energy Partners' owns just a 7% stake in the system while Energy Transfer controls 38.25% of the joint venture.

An oil pipeline under construction in North Dakota.

Image source: Getty Images.

Starting to add up

In addition to the contribution from those growth projects, Energy Transfer Partners should also receive a greater benefit from its increasing ownership of PennTex Midstream Partners (NASDAQ: PTXP). Energy Transfer initially bought a controlling stake in PennTex Midstream last year, but it recently launched a tender offer to purchase all of the outstanding units it did not own. The company noted in late June that it had acquired more than 80% of PennTex Midstream's units, which enabled it to exercise its right to buy the rest that it doesn't currently own. While that deal hasn't closed yet, the increasing stake in PennTex should still bolster its second-quarter results.

Meanwhile, thanks to higher commodity prices at the beginning of this year, shale drillers ramped up their activities, which led to increased production volumes. That improvement should enable the company to collect higher fees and better margins, especially versus the year-ago period when commodity prices were at their weakest point in the downturn.

Things are pointing up

With several strategic initiatives starting to bear fruit, and commodity prices on the upswing, there's reason to be optimistic that Energy Transfer Partners' second-quarter results will show signs of improvement. That said, even if cash flow doesn't bounce back in the quarter because of the timing of its recent project completions, the momentum is clearly shifting back toward growth. Because of that, it looks like better days are ahead for this high-yield pipeline giant given that it still has several major expansion projects nearing the finish line that should catapult cash flow in future quarters. Eventually, this improvement should also reverse the slump in the company's unit price.

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