Energy Transfer Partners (ETP, Financial), the $26.5 billion oil and gas company partner, reported its first-quarter results early this month and delivered an impressive 53.9% revenue growth to $6.9 billion and a contrasting 8.4% drop in profits to $328 million – a 4.8% margin vs. 8% in first-quarter 2016.
The partnership recorded a 20.5% increase in common unitholders’ interest in profits –Â taking into account profits taken out by Energy Transfer’s manager –Â Energy Transfer Partners General Partner LP. The General Partner is owned by Energy Transfer Equity LP (ETE, Financial).
Total returns
Energy Transfer Partners has underperformed the broader Standard & Poor's 500 index in the past five years with 1.7% total gains vs. 14.3% (Morningstar data). So far this year, the partnership has delivered 1.9% total losses to its unitholders vs. the index’s 7.9% total gains.
Valuations
Energy Transfer Partners units are at a premium compared to its peers. According to GuruFocus data, the units traded with a trailing price-earnings (P/E) ratio of 23.4 times vs. 23.9 times industry median, a price-book (P/B) value of 0.87 times vs. 2.2 times and a price-sales (P/S) ratio of 0.76 times vs. 3 times.
In addition, the units had trailing dividend yield of an admirable 8.9% with a whopping 202% payout ratio.
Energy Transfer Partners had P/S and P/E multiples of 2.4 times and 26 times on average 2017 sales and earnings per unit expectations
Energy Transfer Partners
According to the recent annual filing, Energy Transfer Partners is one of the largest publicly traded master limited partnerships in the U.S. in terms of equity market capitalization.
Energy Transfer Partners is engaged in natural gas operations; liquids operations, including NGL transportation, storage and fractionation services; and crude oil, NGLs and refined product transportation, terminaling services and acquisition and marketing activities through Sunoco Logistics.
Energy Transfer Partners has six reportable segments: intrastate transportation and storage; interstate transportation and storage; midstream; liquids transportation and services; investment in Sunoco Logistics; and all other.
Intrastate transportation and storage
Revenues from intrastate transportation and the storage segment are primarily reflected in natural gas sales and gathering, transportation and other fees.
In the first quarter intrastate business sales grew 46% to $816 million – 10% of total unadjusted sales – while having delivered a segment adjusted EBITDA** margin of 21% vs. 32% in first-quarter 2016.
**Energy Transfer Partners 10-K: We report Segment Adjusted EBITDA as a measure of segment performance. We define Segment Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization and other noncash items, such as noncash compensation expense, gains and losses on disposals of assets, the allowance for equity funds used during construction, unrealized gains and losses on commodity risk management activities, noncash impairment charges, losses on extinguishments of debt and other nonoperating income or expense items.
Interstate transportation and storage
Revenues from interstate transportation and storage segment are primarily reflected in gathering, transportation and other fees.
In the first quarter, interstate business sales fell by 9.3% to $235 million – 3% of unadjusted total sales – and had a segment adjusted EBITDA margin of 113% same as the year-prior quarter.
Midstream
Revenues from midstream segment are primarily reflected in natural gas sales, NGL sales and gathering, transportation and other fees.
In the first quarter midstream business sales grew an impressive 50% to $1.64 billion – 20% of total unadjusted sales – and had a segment adjusted EBITDA margin of 20% vs. 24% in first-quarter 2016.
Liquids transportation and services
Revenues from liquids transportation and services segment are primarily reflected in NGL sales and gathering, transportation and other fees.
In the first quarter liquids transportation and services sales grew a whopping 76.5% to $1.6 billion –Â 20% of total unadjusted sales –Â and had a segment adjusted EBITDA margin of 16% vs. 25% in first-quarter 2016.
Investment in Sunoco Logistics
Revenues from investment in Sunoco Logistics segment are primarily reflected in crude sales.
In the first quarter revenue generated from the segment grew 81% to $3.2 billion –Â 39% (largest among all segments) of total unadjusted sales –Â and delivered a margin of 9% vs. 20% in first-quarter 2016.
Energy Transfer Equity purchased 100% of the membership interests of Sunoco GP LLC, the general partner of Sunoco LP, and all of the IDRs of Sunoco LP (SUN, Financial) from ETP, and in exchange, Energy Transfer Equity transferred 21 million Energy Transfer partners common units to Energy Transfer Partners in July 2015.
As of Dec. 31, Energy Transfer has 23% of the limited partner interests in Sunoco Logistics.
In brief description, Sunoco Logistics owns and operates a logistics business, consisting of a geographically diverse portfolio of complementary pipeline, terminaling and acquisition and marketing assets which are used to facilitate the purchase and sale of crude oil, NGLs and refined products primarily in the northeast, midwest and southwest regions of the U.S. In addition, Sunoco Logistics owns interests in several product pipeline joint ventures.
All other
Revenues from all other segments are primarily reflected in refined product sales.
Sales in the segment fell by 9.8% to $770 million, or 9% of total unadjusted sales, and delivered a margin of 16% vs. 12% in first-quarter 2016.
Revenues and net income
On average, Energy Transfer Partners had a three-year sales decline of 22.2%, profit decline average of 13.3% and profit (loss) margin average of 1.2% (Morningstar data).
Cash, debt and book value
As of March, Energy Transfer Partners had $291 million in cash and cash equivalents and $32 billion in debt with debt-equity ratio of 1.08 times vs. 1.04 times in first-quarter 2016.
As observed, leverage did not improve as the company’s debt grew 16% to $32 billion compared to the year earlier quarter and despite as noncontrolling interest rose 46% to $9.6 billion in a year-on-year comparison.
Of its $72.4 billion 13%Â of its assets were identified as goodwill and intangibles while having had a book value of $29.7 billion vs. $26.7 billion in first-quarter 2016.
Cash flow
In the first quarter Energy Transfer’s cash flow from operations declined by 2.9% to $932 million compared to first-quarter 2016. Capital expenditures, meanwhile, were $1.38 billion leaving the company with $452 million free cash outflow.
Despite having this free cash outflow, Energy Transfer was able to provide $165 million in distribution to units and noncontrolling interests, net units issued for cash including redemptions in the quarter.
In the past three fiscal years, Energy Transfer did not register any positive free cash flow yet was able to provide $9.7 billion in distributions to partners and noncontrolling interests. The company was also able to raise $9.2 billion in units issued in the same period.
Conclusion
Energy Transfer Partners has certainly been on a road to recovery given its first-quarter figures as sales and profits to common unitholders, in particular, have improved compared to the year-prior operations.
Nonetheless, closer observation revealed that the partnership has struggled to maintain improved profitability in the segments –Â intrastate transportation and storage, liquids transportation and services, and investment in Sunoco Logistics – which together have contributed to half of the overall unadjusted sales in the past three fiscal years –Â and also about half of total segment adjusted EBITDA on average.
The partnership also had an even more leveraged balance sheet compared to the year prior period, while having issued good amount of units – more likely resulting to more investor dilution – while at the same time maintaining generous payouts to its unitholders.
Meanwhile, 19 analysts have an average target price of $30.95 a share – a 32.7% upside from $23.32 (at the time of writing). Applying three-year sales decline average, P/S multiples, and then applying a 20% margin with the same number of currently outstanding units would indicate a (very) conservative value of just $9 billion or $7.8 per unit.
Despite this depressed historically derived value, sales may have turned for the better and to positive growth in the recent quarter.
In summary, Energy Transfer Partners units are a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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