After facing several challenges over the past few years, Energy Transfer Partners (ETP) has turned things around, which was evident in its first-quarter results. Earnings and cash flow jumped thanks to recent project completions, while a string of asset sales and other strategic financing initiatives have helped bolster its balance sheet and ability to fund additional growth projects. While the company still has some work to do before all its issues are in the rearview mirror, it's certainly heading in the right direction.
Drilling down into the results
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$1.88 billion |
$1.45 billion |
30.2% |
|
Distributable cash flow (DCF) |
$1.2 billion |
$945 million |
29.4% |
|
DCF per unit |
$1.05 |
$0.87 |
20.7% |
|
Distribution coverage ratio |
1.15 |
1.17 |
(1.7%) |
Data source: Energy Transfer Partners.
Like last quarter, Energy Transfer Partners delivered strong earnings and cash flow growth. Because of that, the company was able to cover its jaw-dropping 12.4%-yielding distribution by a healthy 1.15 times. That slight decline from the year-ago quarter was caused by parent company Energy Transfer Equity (ET -0.79%) significantly reducing its support. For a better comparison, the coverage ratio would have still been a solid 1.1 in this year's first quarter without any assistance from Energy Transfer Equity, while it would have been a worrisome 0.98 in the year-ago period without the parent company's help. That improvement is exactly what investors wanted to see this quarter.
Fueling the increase in coverage was earnings growth in virtually all the company's operating segments:
Data source: Energy Transfer Partners. Chart by the author.
The crude oil transportation segment was the standout performer during the quarter, delivering an impressive 148% year-over-year earnings increase. The bulk of that came from putting the controversial Bakken pipeline into service last year as that added $222 million to the bottom line during the period. This segment also benefited from higher volumes on the company's legacy systems in the Permian Basin, as well as improved profitability from its oil marketing activities.
Another standout performer was the NGL and refined products segment, where earnings jumped 18% thanks to higher volumes on several of its systems. The interstate transportation segment also delivered a strong quarter, with profit up nearly 22% versus the year-ago period, driven by the partial start-up of the Rover pipeline.
The only segment where earnings declined was the catch-all one labeled "all other," which houses different investments such as its stake in Sunoco L.P. (SUN -0.60%) and PES, a refining joint venture. PES has struggled due to higher costs, and recently declared bankruptcy. Meanwhile, Energy Transfer's earnings from Sunoco L.P. declined because that entity sold the bulk of its retail assets and then used that cash to repurchase a portion of Energy Transfer's investment.
Image source: Getty Images.
A look at what lies ahead
In addition to posting strong results, Energy Transfer Partners completed several strategic initiatives over the past few months to bolster its balance sheet and liquidity. As noted, Sunoco L.P. bought back some of the units held by Energy Transfer, which brought in $540 million in cash. The company also completed the sale of some of its natural gas compression assets to USA Compression Partners for $1.7 billion, including $1.23 billion in cash and the rest in equity. Finally, the MLP sold $450 million in preferred units. These moves helped reduce the company's leverage ratio from a concerning 5.54 in the year-ago quarter to within striking distance of its target level of 4.
Energy Transfer Equity also made excellent progress on its expansion efforts, including placing the second phase of its Rover Pipeline into service shortly after the quarter ended. Meanwhile, the company continued construction on several additional projects that should enter service later this year, including the Mariner East 2 pipeline and the Revolution System, which should start up in the second quarter.
The company has continued securing new projects in recent months, including a joint venture with Enterprise Products Partners (EPD -0.75%) to restore service to Old Ocean pipeline, which has been idle since 2012. Enterprise and Energy Transfer are also expanding their jointly owned North Texas pipeline, which will flow into Old Ocean by year-end. This transaction will provide an immediate earnings boost for both companies. In addition, Energy Transfer Partners secured a joint venture to build a new ethane export terminal along the Gulf Coast that should start service by the end of 2020. These and other projects in the company's backlog will provide significant cash flow growth over the next few years.
This quarter checked off all the boxes
Energy Transfer Partners got 2018 off to an excellent start by growing earnings and cash flow sharply, which helped improve its coverage and leverage ratios. The company was also very active on the strategic front by closing several deals that bolstered its balance sheet and growth prospects. The quarter clearly shows that the company is heading in the right direction, making its double-digit yield hard to ignore.
