Energy Transfer (NYSE: ETP) isn't immune to the impact of falling oil prices. That was evident in its first-quarter report, where the master limited partnership (MLP) posted lower earnings and cash flow. While the company expects this trend to continue over the coming quarters, causing it to reduce its full-year guidance, it still plans to maintain its high-yielding distribution.  

Drilling down into Energy Transfer's first-quarter earnings

Metric

Q1 2020

Q1 2019

Year-Over-Year Change

Adjusted EBITDA

$2.635 billion

$2.735 billion

(3.7%)

Distributable cash flow (DCF)

$1.417 billion

$1.594 billion

(11.1%)

DCF per unit

$0.53

$0.61

(13.1%)

Distribution coverage ratio

1.72 times

1.99 times

(13.6%)

Data source: Energy Transfer. 

Overall, Energy Transfer's earnings slipped by about 4% during the first quarter, while its cash flow fell by a low double-digit rate. That still enabled it to generate enough cash to comfortably cover its distribution, which is impressive considering that the payout yields an eye-popping 16%. Because of that, it was able to retain nearly $600 million in cash to help finance expansion projects.

Energy Transfer's diversified business model helped cushion the blow from a few weak segments during the quarter:

Energy Transfer's earnings by segment in the first quarter of 2020 and 2021.

Data source: Energy Transfer. Chart by the author.

We'll start with the two biggest positives: Natural gas liquids (NGLs) and refined products, as well as its investment in Sunoco LP (NYSE:SUN). NGLs and refined-product earnings grew by more than 8%. The main drivers were higher volumes on its Mariner East system, the completion of its JC Nolan diesel fuel pipeline joint venture with Sunoco, and higher export volumes. Its share of Sunoco's earnings, meanwhile, increased more than 35% thanks to a higher profit on gallons sold and a make-up payment under a fuel-supply agreement, which more than offset a 2.2% decline in volumes sold.

Unfortunately, those positives weren't enough to offset some weakness in a few of its other segments, led primarily by its crude oil and interstate gas-pipeline businesses. Crude oil earnings tumbled 20%, due to an adjustment in the value of its inventories as a result of lower oil prices and lower rates on its Texas oil pipeline system. Those factors more than offset the increase from terminal operations acquired last year and higher volumes on its Bakken and Bayou Bridge pipelines. Interstate gas pipeline earnings, meanwhile, declined by about 11% due to lower rates and volumes on several systems as a result of less favorable market conditions and a contract rate adjustment at its Lake Charles liquified natural gas (LNG) facility.

Sunset through the twists of a pipeline system.

Image source: Getty Images.

A look at what's ahead for Energy Transfer

The volatility in the oil and gas market is driving a couple of changes to Energy Transfer's 2020 outlook. The company has revised its guidance for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to between $10.6 billion and $10.8 billion. That's down from its initial forecast range of $11 billion to $11.4 billion, which at the midpoint would have been flat with last year's level

The company also plans to reduce its growth-capital spending plan by $400 million, bringing it down to $3.6 billion. It's also evaluating the deferral of another $300 million to $400 million of investments. The company said that 70% of the growth capital it plans to spend this year would go toward projects that are already more than 60% complete, which puts them on pace to start service by early next year. The company spent $1 billion of capital during the first quarter, which helped fund the Panther II gas-processing plant and Frac VII facility that started service earlier this year.

Energy Transfer also noted that it has about $4 billion of liquidity -- cash and available borrowing capacity -- which gives it plenty of financial flexibility to navigate through the current challenging market cycle. It already completed its debt refinancing for the year, so it doesn't need to worry about any maturities until next year.

The company believes that capital spending will average less than $2 billion per year over the next three-to-four years. As a result, it expects to be free cash-flow positive after paying its high-yielding distribution by 2021. That will provide it with the flexibility to pay down debt or repurchase some of its deeply discounted units, which have lost about 40% of their value due to the volatility in the energy sector this year.

Navigating the market volatility fairly well

While Energy Transfer doesn't have as much insulation from the energy sector's volatility as some of its pipeline peers, it's still on track to generate a significant amount of earnings and cash flow this year. Because of that, and its strong liquidity profile, the company has the funds needed to cover its distribution and remaining capital program. That suggests it should be able to maintain its high-yielding payout this year. Meanwhile, that payout will be on an even more sustainable footing in 2021 and beyond as its capital spending rate declines.