While last year had its share of challenges for Energy Transfer Partners (NYSE:ETP), the pipeline company ended with its best quarter in years. Earnings and cash flow in the fourth quarter surged thanks to recently completed projects, which enabled the company to cover its sky-high 12%-yielding distribution with ease.
That strong financial performance was just one of three main points CFO Tom Long made on the accompanying quarterly conference call, making it clear that the company's finances are on the upswing.
1. It had exceptional results this quarter
Long led off his prepared remarks with the following comment:
I just want to start by saying that we are pleased by Energy Transfer's very strong fourth quarter. ETP's adjusted EBITDA increased more than 30%, and DCF [distributable cash flow] attributable to the partners of ETP, as adjusted, increased approximately 25% over the fourth quarter of last year.
As Long notes, the company's financial results significantly improved during the quarter. Leading the way was a more than 130% surge in earnings from its crude oil transportation and services segment, thanks to the addition of several assets, including the start-up of its controversial Bakken Pipeline. The company also got a boost from its midstream segment, where higher oil prices enabled it to earn more money for the services it provides.
2. It's bolstering the ability to fund expansion projects
Long also noted that there's plenty more growth coming down the pipeline. He pointed to the company's progress on several projects, including placing phase 1B of its Rover Pipeline into service in mid-December, and said that phase 2 should come online next quarter. In addition, he noted that the company is putting the finishing touches on its Revolution project and nearing completion of Mariner East 2. Overall, this year the company expects to spend $4.5 billion on expansion projects, which is a huge backlog to finance.
That led him to run through the company's liquidity position and funding strategy. He pointed out that Energy Transfer issued $2.25 billion in long-term debt last September, using $1.2 billion to redeem higher-cost debt, leaving the rest to finance expansions. In November, the company issued $1.5 billion of preferred units at a very reasonable cost. Finally, after the quarter closed, the company agreed to sell its compression business (CDM Resource Management) for $1.225 billion in cash; it also sold $540 million of Sunoco LP's (NYSE:SUN) units back to its motor-fuel-distributing sibling.
Those transactions led Long to conclude:
We expect our recent financings, proceeds from the sale of CDM, and the SUN unit sale, and anticipated excess coverage in 2018 [will] provide us liquidity to fund our 2018 growth projects. While we continue to expect that we will not need to issue equity at least through the middle of this year, we are targeting not having any equity needs in 2018.
In other words, the company believes it has secured almost all the funding it needs to finance its project backlog for the entire year, which would enable it to avoid selling any more of its deeply discounted units.
3. It's holding back on growing the payout for now
Another factor driving that view is the company's recent decision regarding its high-yield distribution. Long said:
I'd like to touch on our recent distribution announcement. In January, ETP announced a distribution of $0.565 per common unit for the fourth quarter or $2.26 per common unit on an annualized basis. ...
This distribution is flat compared to the third quarter of 2018. Even with ETP's great fourth quarter and the contribution from major projects coming online, we felt with ETP's current cost of equity, it was prudent to temporarily suspend the distribution growth in order to retain excess cash flow, to fund the equity component of our growth projects and continue to reduce our leverage.
Initially, Energy Transfer believed that it could grow its already high-yielding payout at a double-digit annual rate over the next few years, given the volume of growth projects coming down the pipeline. However, it has decided to hold off on increasing the payout further, and will instead use that cash to help fund expansion projects, so it doesn't need to sell any more high-cost equity.
In some ways, this is similar to the plan of rival Enterprise Products Partners (NYSE:EPD), which decided to slow its distribution growth rate last year. That move will further strengthen Enterprise Products Partners' coverage ratio, and provide it with cash to fund the equity portion of a $2.5 billion annual capital program starting next year. Both moves make sense because it will strengthen their finances over the long term.
Heading in the right direction
Despite all the growth coming down the pipeline, Energy Transfer's units have lost a quarter of their value in the past year. That's mainly due to concerns surrounding the company's financial situation and how it will fund a massive slate of projects.
However, as the CFO made clear on the call, it's actively addressing those worries, and made notable progress on securing the funding it needs for most of this year. While that doesn't mean its high-yield payout is on a sustainable footing just yet, it certainly appears to be heading in that direction.