As expected, Energy Transfer Partners' (ETP) turnaround continued in the third-quarter. The MLP reported a 25.5% spike in adjusted EBITDA to $1.74 billion, which fueled a 27.4% surge in distributable cash flow (DCF) to $1.05 billion. That rising cash flow enabled the company to cover its growing distribution to investors, though to do so, it still needed the help of parent Energy Transfer Equity (ET 0.38%). Because of that, the company's monster 13% yield isn't on solid ground just yet.
Drilling down into the numbers
Fueling Energy Transfer's strong showing was nearly across-the-board growth in its various business units:
Data source: Energy Transfer Partners. Chart by author. In millions of dollars.
That said, the company's crude oil transportation and services segment was by far the biggest contributor, delivering a 134% year-over-year increase in earnings. The primary driver was the start-up of the company's controversial Bakken Pipeline, which when combined with a recently acquired crude oil gathering system in West Texas, fueled $194 million in incremental earnings during the quarter. In addition to the benefit from those growth initiatives, earnings from Energy Transfer's existing oil assets were $28 million higher thanks to an increase in volumes flowing throughout its system.
Another highlight was the company's intrastate transportation and storage segment, which delivered a 22.6% increase in earnings thanks to higher natural gas demand by Mexico, as well as new pipes added to the system. Meanwhile, profitability in the midstream segment rose 13.4% as a result of the recent acquisition of PennTex midstream, an improvement in energy prices, and higher volumes flowing across its systems. Finally, earnings in the NGL and refined products segment rose 10.4% due to higher volumes and improving margins while earnings from its "all other" segment rose primarily from higher earnings at its refining joint venture.
The only business unit to take a step back was interstate transportation and storage. While volumes flowing through its various interstate natural gas pipelines rose, earnings slipped due to lower revenue collected across three systems. However, the company partially offset that drop by placing part of its Rover pipeline into service at the end of August.
Image source: Getty Images.
One concern remains
Overall, Energy Transfer Partners reported a strong quarter. However, one number continues to stand out, which is its distribution coverage ratio. On the surface, that number looked fine since Energy Transfer only distributed $925 million of the $1.049 billion in DCF it produced in the quarter, which implies that it covered the payout 1.13 times.
However, that doesn't take into account that parent company Energy Transfer Equity relinquished $163 million in cash during the quarter -- which it gave up as part of a support agreement -- so its MLP had a bit more financial flexibility as it worked through a major expansion phase. If it didn't agree to provide that assistance, Energy Transfer Partners would have paid out $39 million more than it pulled in during the quarter. That's worth noting because Energy Transfer Equity's relinquishment will go from $173 million in the fourth quarter down to $153 million for all of 2018.
That said, Energy Transfer Partners believes it can grow out of this tightening spot by completing the rest of its expansion projects. The company expects to finish its Revolution System, Permian Express 3, and Mariner East 2 projects by year-end, followed by phase two of its Bayou Bridge Pipeline and the rest of the Rover Pipeline in the first quarter of next year with five more projects expected to enter service over the final three quarters of 2018. It anticipates that these projects will fuel "significant EBITDA growth" and "substantial cash flow growth" over the next year. Because of that, the company continues to believe that it can increase its already jaw-dropping distribution at a low double-digit rate in the near-term.
Still a high-risk, high yield
Energy Transfer Partners' growth projects are starting to pay off, fueling a remarkable turnaround in the company's cash flow. More growth is on the way considering the volume of expansion projects the company expects to complete over the next year. Because of that, the MLP fully believes it can support its distribution, which has given it the confidence to start boosting the payout. However, the current numbers don't yet support that view, which is why the yield has risen above 13% to reflect the market's skepticism in Energy Transfer's ability to deliver sustainable income growth over the long-term.
