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Energy Transfer's Earnings Tumble on Turbulent Oil Market Conditions

By Matthew DiLallo – Aug 6, 2020 at 11:34AM

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Lower oil prices and volumes took a bite out of the high-yielding MLP's cash flow.

Energy market conditions were abysmal during the second quarter. Crude oil collapsed because demand evaporated as governments imposed restrictions to slow the spread of the coronavirus. This environment significantly impacted Energy Transfer's (ET -1.67%) second-quarter results, which tumbled compared with the prior-year period. 

A look at Energy Transfer's second-quarter results

Metric

Q2 2020

Q2 2019

YOY Change (Decline)

Adjusted EBITDA

$2.438 billion

$2.825 billion

(13.7%)

Distributable cash flow (DCF)

$1.271 billion

$1.602 billion

(20.7%)

DCF per unit

$0.47

$0.61

(23%)

Distribution coverage ratio

1.54 times

2.0 times

(23%)

Data source: Energy Transfer.

As that table shows, Energy Transfer's earnings and cash flow plunged during the period. That's due to weaker results across most of the company's various business segments:

Energy Transfer's earnings by segment during the second quarter of 2020 and 2019.

Data source: Energy Transfer. Chart by the author.

The biggest issue was within the company's crude oil transportation and services segment, where earnings tumbled 31%. The primary problem was reduced volumes on its pipeline systems out of the Permian Basin and Bakken because of lower oil prices, which forced producers to shut-in wells.

Another weak spot was the company's intrastate transportation and storage segment, where earnings tumbled 35.5%. The main issue weighing on results was lower natural gas sales.

Energy Transfer partly offset these and other issues with growth from its natural gas liquids (NGLs) and refined-products assets and its investment in Sunoco (SUN -1.04%). The main factor fueling the 4.7% increase in NGL earnings was higher volumes on its Mariner East pipeline system. Meanwhile, Sunoco's earnings jumped 19.7% due to a higher profit on motor fuel sales and lower operating and selling, general, and administrative expenses.

A pipeline and an oil pump at sunset.

Image source: Getty Images.

A look at what's ahead for Energy Transfer

While Energy Transfer's results were under pressure during the second quarter, the company noticed an upward trend in volumes and commodity prices toward the end of the quarter. But the recovery has been uneven due to spikes in COVID-19 cases as states reopened their economies. Because of that, the company is pulling back its guidance range for the second time this year. It now sees adjusted EBITDA for the year coming in between $10.2 billion and $10.5 billion. That's down from a range of $10.6 billion to $10.8 billion at the end of the first quarter and $11.0 billion to $11.4 billion to start the year.

Energy Transfer also reduced its capital spending plan again. It now expects to invest $3.4 billion this year, down $200 million from its prior view and 15% from its initial estimate. Meanwhile, the company sees capital spending falling significantly over the next few years, projecting $1.3 billion in 2021 and $500 million to $700 million in 2022 and 2023. That outlook suggests the company will begin producing significant excess cash after paying its distribution and covering capital spending.

That free cash will give Energy Transfer the funds to bolster its balance sheet. Once its leverage is within its target range, the company could begin returning more money to investors via a higher distribution or a repurchase program.

There's light up ahead for the dividend

While cratering oil prices impacted Energy Transfer's cash flow, it still managed to generate $448 million in excess cash after covering its monster 17%-yielding distribution in the quarter. That provided it with about half the funds needed for capital projects during the quarter. That gap should go away in the next year, which will put its distribution on a much firmer foundation, making it a potentially intriguing option for income investors.

Matthew DiLallo owns shares of Energy Transfer LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Energy Transfer LP Stock Quote
Energy Transfer LP
ET
$10.93 (-1.67%) $0.18
Sunoco LP Stock Quote
Sunoco LP
SUN
$38.02 (-1.04%) $0.40

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