What: Shares of Energy Transfer Partners (NYSE: ETP), a master-limited partnership that owns and operates approximately 62,500 miles of natural gas and natural gas liquid pipelines, surged 21% in March based on data from S&P Global Market Intelligence. The reason behind the move appears to be a combination of rebounding commodity prices and the completion of an asset dropdown to Sunoco LP (NYSE:SUN).
So what: Following a rough series of months, both crude oil and natural gas prices found solid footing in late February and throughout much of March. Crude oil bounced from a low of nearly $30 in February to almost $42 by mid-March. Likewise, natural gas prices jumped from a low of $1.64/mmBTU to roughly $2/mmBTU. Midstream providers generally have locked-in, fee-based contracts, but bankruptcies could potentially upset their predictable cash flow. Higher commodity prices could help alleviate concerns of more bankruptcy filings from producers, thus putting ETP's shareholders at temporary ease.
Additionally, at the end of March, Energy Transfer Partners and Sunoco LP announced that they'd completed their previously announced dropdown of a 68.42% interest in Sunoco, LLC and a 100% interest in Sunoco Retail LLC for $2.23 billion. In addition to $2.2 billion in cash, ETP was issued $194 million worth of Sunoco LP common units. This is the final dropdown in a series of dropdowns from ETP to Sunoco LP that have totaled $5.7 billion since Q4 2014.
Now what: But should you be diving headlong into ETP after such a positive month? I'd say not so fast.
ETP has a number of issues to contend with. For instance, its current yield of 13.4% might seem incredibly attractive, but it may not be sustainable. For the entirety of 2015, ETP's dividend coverage ratio was 0.99, down from 1.59 in 2014. In other words, it paid out every cent it earned as part of its cash distributions, and then some, in 2015. Instead of cautiously approaching its cash distribution in 2015, ETP made expanding it a priority, which in hindsight looks like a mistake. If ETP's dividend were to be cut, I'd venture a guess that shareholders would take it out on the master-limited partnership's unit price.
Also, ETP's contracts aren't providing as much protection from a tumble in natural gas and natural gas liquid prices as expected. Even though roughly 80% of its contracts are fee based, less than two-thirds of its volumes were protected by minimum volume guarantees. Long story short, ETP is more exposed to commodity price changes than investors might realize.
In sum, while it was a good month for ETP, investors may want to consider ringing the register and looking for energy assets on firmer ground.