While most MLPs are largely immune to commodity price volatility that, unfortunately, doesn't describe Energy Transfer Partners (NYSE: ETP). The midstream MLP was hit by a number of issues, including weak commodity prices, which took a big chunk out of its distributable cash flow. However, that was just one of the storylines in what was a very busy quarter for the company.
1. Commodity price volatility stung its results
Energy Transfer Partners reported distributable cash flow, or DCF, after adjustments of $740 million. That's 14.9%, or $130 million, lower than the year-ago quarter. On a per unit basis, the drop is even worse, with DCF per unit falling from $2.04 to $0.77, or 62.3%. This resulted in a worrisome distribution coverage ratio of 0.84 times for the quarter, and 0.97 times for the year, suggesting the company is paying out more cash than it's earning, which is a clear warning sign. That didn't stop the company from increasing its quarterly distribution last month, though, with the payout now 8.2% higher than last year.
One of the issues impacting DCF during the quarter was a "partial reversal from the second quarter 2015 tax benefit, with $79 million of current income tax expense for the third quarter of 2015," according to the company. That accounts for more than half of the year-over-year decline. Having said that, the company was also affected by a lower overall pricing environment for percent-of-proceeds volumes, continued shut-in of volumes in the Northeast, and unscheduled plant outages in the Permian Basin. The first two issues were directly related to weak commodity prices and could persist until prices improve. While this is a concern, it's not unexpected.
2. It's getting back to basics
While weak commodity prices stunted its cash flow in the quarter, prices couldn't hold back the company's progress on reshuffling its portfolio, with it completing two important transactions with the greater Energy Transfer Equity (NYSE: ETE) family. Both transactions simplified the ownership of the assets and will enable Energy Transfer Partners to get back to basics and focus its attention on its core natural gas pipeline business.
In the first transaction, Energy Transfer Equity acquired 100% of the ownership interest in Sunoco GP, which is the general partner of Sunoco LP (NYSE: SUN), as well as all of the incentive distribution rights. In exchange, it transferred back 21 million units of Energy Transfer Partners that it had owned. The net result of this transaction is that Energy Transfer Partners has deconsolidated Sunoco LP from its financials, which simplifies its financials and, in a sense, gets it out of the gas station business. That said, it still owns a substantial stake in Sunoco LP comprising of 26.8 million common units and 10.9 million subordinated units.
The other transaction involved Sunoco Logistics Partners (NYSE: SXL), which completed its acquisition of a 40% membership interest in Bakken Holdings Company. In exchange for this interest, Sunoco Logistics Partners transferred 9.4 million of its units and $382 million in cash to Energy Transfer. In completing this transaction,Energy Transfer is not only bolstering its balance sheet, but it transfers a crude oil pipeline project to Sunoco Logistics Partners, which is its area of expertise.
3. It has ample liquidity
The last thing worth noting this quarter is the fact that Energy Transfer was able to bolster its liquidity today and in the future. Current liquidity got a boost from the cash it picked up from Sunoco Logistics Partners. Further, it sold 4.4 million of its own units through its at-the-market equity program, picking up another $206 million. That cash is important because it can bridge the current gap in its cash flow as well as fund growth projects.
However, it is also worth noting that Energy Transfer Partners still has a significant ownership interest in both Sunoco LP and Sunoco Logistics Partners. While not as liquid as cash, though both do pay quarterly cash distributions, these are assets that could be sold in the future if the company needs cash.
There are three things Energy Transfer Partners investors need to take away from its third-quarter report. First, it is being affected by the weakness in commodity prices, which is something investors need to keep an eye on. Second, it is getting back to basics by selling stakes in assets that are better owned by other members of the Energy Transfer family. Finally, thanks to these and other transactions, the company has ample liquidity to weather the current storm in the energy market.