Energy Transfer Partners (ETP) has endured its share of trials over the past year as the downturn in the oil market, as well as some operational missteps and unforeseen delays, have weighed on its earnings and cash flow. However, as hoped, the company was able to start turning things around in the second quarter. Its financial results evidence that, as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 16.7% versus the year-ago period to $1.6 billion while distributable cash flow surged 21.5% to $990 million.
Here's a look at what fueled those results and what the pipeline and processing company still needs to do in the coming quarters to convince investors that it's heading in the right direction.
Drilling down into the numbers
With the consolidation transaction between the legacy Energy Transfer Partners and Sunoco Logistics Partners closing in April, the company has revised its reportable segments to reflect its consolidated results and streamlined focus. Here's a closer look at how they performed versus the year-ago period:
As the chart shows, most of the company's segments performed well. However, midstream and crude oil transportation and services were the standout performers in driving earnings higher during the quarter.
The midstream segment has undergone a dramatic turnaround in in recent quarters, thanks in part to improving commodity prices. In fact, last quarter $45 million of the increase in segment earnings was due to the impact of higher oil, NGL, and natural gas prices on its non-fee based margin. However, the company also benefited from higher fee-based revenue due to improving volumes in the Permian Basin and Northeast regions. Also, recent acquisitions such as PennTex Midstream Partners helped fuel the year-over-year improvement.
Meanwhile, segment earnings in the crude oil transportation and services segment more than doubled thanks in part to a $66 million benefit from last in, first out (LIFO) accounting, which incidentally was a drag on results last quarter. That said, the bigger boost came from the improved results in its crude oil pipelines, joint ventures, and terminal activities, with recent expansion projects and the acquisition of Vitol's crude oil assets providing the biggest boost by increasing earnings by $109 million. That said, the company also benefited from higher volumes and lower expenses on its legacy assets, which added $20 million to its bottom line. These positives helped offset lower results from its crude oil acquisition and marketing activities, which was an issue that also plagued rival Plains All American Pipeline (PAA 1.10%) during the quarter. That said, this was a much bigger problem for Plains All American Pipeline because it gets a larger percentage of its earnings from these activities.
These positives more than offset continued weakness in Energy Transfer Partners' intrastate and interstate transportation and storage segments. In the intrastate segment, lower fee revenue and a decrease in margins offset an increase in natural gas sales and the benefit from the Trans-Pecos and Comanche Trail pipelines that entered service this year. Meanwhile, the interstate segment endured weak volumes across several pipelines due to mild weather.
One number that still needs to improve
The significant improvement in several of Energy Transfer's operating segments enabled the company to produce $990 million in distributable cash flow during the quarter, which was more than enough to cover the $842 million in cash it distributed to partners. That resulted in a healthy 1.18 times coverage ratio, which was an improvement from the 1.15 times ratio of the year-ago quarter. That said, there's a bit more to this story, because Energy Transfer Partners' parent company Energy Transfer Equity (ET 0.07%) is currently providing it some financial support by relinquishing a portion of its incentive distribution rights (IDRs). During the second quarter, this relinquishment amounted to $162 million, which means that Energy Transfer Partners wouldn't have covered its payout if it weren't for this support.
That's worth noting because this aid will start to diminish next year. Currently, Energy Transfer Equity plans to give up $163.3 million in IDRs next quarter and $173.3 million in the fourth quarter before dropping its support to $153 million for the entirety of 2018 and $128 million for 2019. That means Energy Transfer Partners needs to increase its cash flow to cover this higher payment to Energy Transfer Equity in the coming years. The good news is that the company has several growth projects underway that should enter service by the end of the year, which when combined with recently completed projects should boost earnings and cash flow to more than cover this difference. In fact, Energy Transfer believes that these projects will deliver a such a significant uplift in earnings and cash flow that it can grow its distribution to investors at a low-double-digit rate over the coming years while maintaining a more than 1 coverage ratio.
It's all starting to come together
Energy Transfer Partners has finally reversed its declining cash flow as its strategic initiatives are starting to pay off. While the company still has some more work to do before it's in the position to restart distribution growth, it's heading in the right direction for once. The hope is that these improving results will eventually start taking the company's unit price up with it and begin reversing its nearly 35% decline over the past year. Add that potential upside to the company's already generous current yield, and Energy Transfer Partners could deliver robust returns for investors in the coming years if it continues delivering on its promised growth.