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Will Energy Transfer Partners LP Continue Its Turnaround in the 3rd Quarter?

Matthew DiLallo, The Motley Fool

Energy Transfer Partners (NYSE: ETP) has struggled mightily throughout the oil market downturn. A combination of low oil prices and challenging capital market conditions cut into the company's cash flow and its ability to obtain the money it needed to complete a significant expansion phase.

However, after completing one of its largest growth projects earlier this year, the company's cash flow finally turned a corner last quarter. That suggests the energy infrastructure giant should show continued financial improvement when it reports third-quarter earnings on Tuesday evening, despite an unexpected headwind.

A quick look back

In the second quarter, Energy Transfer Partners reported that adjusted EBITDA improved 16.7% to $1.6 billion, which helped fuel a 21.5% surge in distributable cash flow to $990 million. Driving that turnaround was a notable uptick in earnings from the company's midstream and crude oil transportation and services segments:

A chart showing Energy Transfer's earnings by segment in the second quarter of 2016 and 2017.
A chart showing Energy Transfer's earnings by segment in the second quarter of 2016 and 2017.

In millions of dollars. Data source: Energy Transfer Partners. Chart by author.

Among the drivers of that increase were expansion projects and acquisitions the company completed over the past year, including its controversial Bakken Pipeline project, which went into service at the beginning of June.

Expect more of the same in Q3

That mid-second-quarter in-service date for the Bakken Pipeline meant that Energy Transfer, and its partners, didn't get the full benefit of that project in that quarter. However, several of its joint venture partners have already noted that the system was an important driver of results in the third quarter. For example, refining and logistics giant Phillips 66 (NYSE: PSX), which currently owns a 25% stake in the joint venture, noted that adjusted net income in its transportation segment jumped $24 million year over year to $98 million. Phillips 66 pointed out that "the increase reflects a full quarter of commercial operations of the Bakken Pipeline," as well as higher volumes elsewhere. Meanwhile, 25% system stakeholder Enbridge Energy Partners (NYSE: EEP) noted that its third-quarter results "benefited from a full quarter of contributions from EEP's interest in the Bakken Pipeline System." These statements suggest that earnings in Energy Transfer's crude oil transportation segment will also benefit from a full quarter of that system.

Moreover, earnings in Energy Transfer's midstream segment should be meaningfully higher than they were in the year-ago period, when it pulled in $314 million in adjusted EBITDA. That's because the company will benefit from its recent acquisition of PennTex Midstream, which alone boosted earnings by $24 million last quarter. In addition, the segment has benefited from the notable uptick in commodity prices and higher volumes from an increase in drilling activities this year, which combined to add $83 million to its bottom line in the second quarter. While crude oil started the third quarter on a weak note, that shouldn't have much impact on volumes or earnings in the quarter, especially since it has rallied sharply off the bottom.

Several oil pipelines overhead with a blue background and oil pumpjacks  in the background.
Several oil pipelines overhead with a blue background and oil pumpjacks in the background.

Image source: Getty Images.

One headwind to note

Despite all the positive prospects, Energy Transfer did go up against an unexpected volume headwind during the quarter: Hurricane Harvey. The company announced in early September that the storm impacted several of its segments. As a result of the closure of the Houston ship channel and several refineries, oil and refined product shipments were reduced for a few days, while a production shutdown in the Eagle Ford shale of south Texas caused some interruption in natural gas liquids service during the quarter. Even so, the company noted that the overall impact on its operations was minimal.

That lines up with what its peers have already reported. For example, ONEOK (NYSE: OKE) overcame the effects of Hurricane Harvey with ease. While ONEOK noted that the storm did impact some volumes, the financial hit was just $4.5 million, which was pocket change for a company that produced $517.2 million in adjusted EBITDA last quarter. Likewise, Williams Partners (NYSE: WPZ) experienced minimal financial impact from Hurricane Harvey. Overall, Williams Partners noted that the storm only knocked $1 million off its bottom line, which was nothing more than a rounding error for a company that produced more than $1.1 billion of adjusted EBITDA last quarter. In light of these reports, it seems unlikely that the storm did any damage to Energy Transfer's third-quarter results.

The quarter should provide more confirmation

Energy Transfer Partners' turnaround looks like it will have gained steam in the third quarter thanks to the positive impact of several growth initiatives and an improving energy market. That would go a long way toward confirming that the company's lucrative distribution to investors, which currently yields a jaw-dropping 13.3% after a recent increase, is on an increasingly more stable foundation.

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Matthew DiLallo owns shares of Phillips 66. The Motley Fool owns shares of and recommends ONEOK. The Motley Fool has a disclosure policy.