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Energy Transfer's Diversification Paid Dividends in Q2

By Matthew DiLallo – Aug 4, 2021 at 8:20AM

Key Points

  • Improving market conditions helped boost Energy Transfer's results.
  • The MLP remains on track with its full-year forecast.
  • Energy Transfer is making excellent progress on its debt reduction program.

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The midstream company is benefiting from strength in some businesses, offsetting weakness elsewhere.

Energy Transfer's (ET -0.85%) second-quarter results weren't the blowout it reported in the first quarter when it benefited from winter storms in Texas. However, the master limited partnership (MLP) still posted solid results in the period, largely thanks to its diversified midstream operations.  

Here's a closer look at the quarter and what's ahead for the energy company.

Drilling down into Energy Transfer's second-quarter results

Metric

Q2 2021

Q2 2020

Year-Over-Year Change

Adjusted EBITDA

$2.616 billion

$2.438 billion

7.3%

Distributable cash flow (DCF)

$1.393 billion

$1.271 billion

9.6%

DCF per unit

$0.52

$0.47

10.6%

Distribution coverage ratio

3.36 times

1.54 times

118.2%

Data source: Energy Transfer. 

Energy Transfer grew its earnings and cash flow at a high single-digit rate compared to the year-ago period, when the COVID-19 pandemic weighed on the energy market. The company benefited from improved results in several of its business segment, which more than offset weakness elsewhere:

Energy Transfer's earnings in the second quarter of 2020 and 2021.

Data source: Energy Transfer. Chart by the author.

The highlight in the quarter was the company's midstream assets, which gather and process natural gas. Earnings jumped 30% year over year, fueled by favorable natural gas and natural gas liquids (NGL) prices. That more than offset higher operating expenses during the quarter.

Its NGL and refined products segment also delivered strong results, growing its earnings by more than 9%. The company benefited from initiating service on its propane and ethane export pipelines at the Nederland Terminal. Meanwhile, refined product transportation volumes recovered from their pandemic-related decline in the year-ago period.

Finally, Energy Transfer's catch-all segment, "all other," produced significantly higher earnings in the period. That's due to a range of factors, including higher power trading activities, higher gas revenue and lower costs at its compressor equipment business, and lower utility expenses.

These positives more than offset weaker results in the company's interstate and crude oil segments. Interstate natural gas pipeline earnings declined due to contract expirations and a customer bankruptcy. Meanwhile, crude oil earnings fell because of lower rates and lower realized gains from its storage terminals, offsetting the positives of higher oil volumes in the period.  

A person in a hard hat looking through an empty pipeline.

Image source: Getty Images.

A look at what's ahead for Energy Transfer

Energy Transfer's solid showing in the second quarter has the company on track to achieve its revised full-year forecast. The company anticipates generating between $12.9 billion and $13.3 billion of adjusted EBITDA this year. Meanwhile, it expects to invest $1.6 billion in capital projects. 

However, it's worth noting that those numbers don't include its pending acquisition of fellow MLP Enable Midstream (ENBL). Energy Transfer sees that $7.2 billion deal closing in the second half. The company expects Enable to add nearly $1 billion of annual EBITDA to its total.  

Looking further ahead, Energy Transfer sees its growth spending declining to between $500 million to $700 million per year in the 2022 to 2023 timeframe. That declining spending will enable the company to generate more free cash flow in the coming years.

The company is currently directing all its excess cash after paying its current distribution and funding its capital program toward repaying debt. The MLP repaid $1.5 billion in debt during the second quarter, bringing its year-to-date total to $5.2 billion. That gave two credit rating agencies the confidence to affirm Energy Transfer's investment-grade credit rating and revise their outlook on the MLP from negative to stable. As the company continues to improve its balance sheet, it will have more financial flexibility to return additional cash to investors either through a higher distribution or unit repurchase program.

Heading in the right direction

Energy Transfer delivered solid second-quarter results as it benefited from the recovery in the energy markets. It's generating a lot of cash, giving it the money to pay its 6.3%-yielding distribution, fund its expansion program, and repay debt. It made excellent progress on strengthening its balance sheet this year, putting its big-time payout on an even firmer long-term foundation.

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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Energy Transfer LP Stock Quote
Energy Transfer LP
ET
$12.26 (-0.85%) $0.10
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