As expected, Energy Transfer Partners' (NYSE: ETP) growth engine continued gaining steam in the fourth quarter, with earnings and cash flow up sharply thanks to a slew of recently completed expansion projects. Those rising results are providing more support for the company's high-yield payout, which currently sits at an eye-popping 12.4% because of the combination of a 26% slide in its unit price over the past year along with a more than 5% increase in the distribution level. Meanwhile, with more growth on the way and a boatload of balance sheet strengthening initiatives in the works, that risk of a distribution cut continues to fall.
Drilling down into the numbers
Energy Transfer Partners delivered growth in every metric that matters:
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)
Distributable cash flow (DCF)
DCF per unit
Distribution coverage ratio
Data source: Energy Transfer Partners.
While most of its operating segments grew earnings, two stole the show:
Data source: Energy Transfer Partners. Chart by author. In millions of dollars.
Leading the way was the crude oil transportation and service segment, where earnings rocketed 130% year over year. The main driver was the company's expansion efforts thanks to the start-up of its Bakken Pipeline, the acquisition of a crude oil gathering system in Texas, and the addition of a joint venture asset, which combined to add $247 million in earnings during the quarter. The company also benefited from higher volumes on its legacy assets resulting from rising crude production in the United States.
Earnings in the midstream segment also rose sharply, up more than 50% versus last year's fourth quarter. The primary driver here was an improvement in oil prices, which enabled the company to capture additional earnings from higher margins. Meanwhile, higher volumes flowing through its systems and the acquisition of PennTex Midstream also padded the bottom line.
The interstate transportation and storage segment also provided a notable boost, with earnings rising 11%. Fueling that improvement was some incremental revenue from the partial start-up of the company's Rover Pipeline, which should enter full service by the end of the first quarter.
The growth from those segments more than offset some minor weaknesses in the intrastate transportation and storage and "all other" segments. The biggest decline stems from some franchise-related items in that "all other" segment. That's after the company reported a $24 million drop in earnings resulting from the termination of management fees paid by its parent Energy Transfer Equity (NYSE: ETE) and a $6 million reduction in profits from its investment in sibling Sunoco LP (NYSE: SUN).
No matter how you crunch them, Energy Transfer's numbers looked good. Image source: Getty Images.
The one metric that stands out the most
Of the numbers Energy Transfer Partners reported, the one that jumps out is the distribution coverage ratio, which was a comfortable 1.3 during the quarter. But there's a bit more to the story here, since the continued support of Energy Transfer Equity has inflated that number temporarily because it has given up a portion of its lucrative management fees. However, even if we adjust for that support, Energy Transfer Partners still covered its high-yield distribution with ease.
Overall, Energy Transfer Partners generated $1.2 billion of DCF during the quarter and distributed $921 million to partners, leaving it with $274 million in excess cash. While Energy Transfer Equity gave up $174 million in fees during the quarter, Energy Transfer Partners still had $100 million to spare, meaning it covered its payout by 1.09 times, which is the first time in quite a while the company has achieved true excess coverage.
Its finances are getting better by the day
In addition to more than fully covering the payout, Energy Transfer has several strategic initiatives under way to help shore up its financial situation further. During the quarter, the company raised $2.25 billion of new debt and sold a stake in the Rover Pipeline to a private equity fund for $1.57 billion, giving it the money to pay off $500 million in higher cost debt and fund expansion projects. Meanwhile, after the quarter ended, the company sold the bulk of its compression business for $1.225 billion in cash and a portion of its investment in Sunoco LP back to its sibling for $540 million. These moves pushed the company closer to hitting its leverage target while also helping bridge the funding gap as it seeks to finance a large slate of expansion projects.
The reward remains compelling, but the risk is starting to fade
The reason Energy Transfer has such a high-yield is that investors have their doubts about its long-term sustainability. However, the company's fourth-quarter results show that those risks are slowly melting away. If the company can keep up its progress, it should help lift the weight that has been holding down its valuation, potentially setting risk-tolerant investors up to score a significant return from here.
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