Postcard From The End Of America: Marcus Hook, PA

This is source I found from another site, main source you can find in last paragraph

Energy Transfer Partners LP (NYSE:ETP) yields a sky-high 11% yet still sports a solid coverage ratio. Let's take a look at this mainstay of America's oil & gas industry. As Energy Transfer Equity LP (NYSE:ETE) is ostensibly an indirect way to play Energy Transfer Partners LP, this piece concerns investors from both camps.

Overview

Midstream master limited partners are judged based on their ability to cover their distributions through distributable cash flow streams. An MLP's distribution coverage ratio and its DCF generation are the two biggest things investors pay attention to, and Q2 offered up positive updates on that front.

From Q1 to Q2 2017, Energy Transfer's (pro forma for SXL and ETP merger) $907 million in DCF grew to $990 million, equal to a 9.2% sequential boost. Even better, its coverage ratio grew from 1.13X to 1.18X while its payout moved a tad higher q-o-q. A ratio over 1.15X is considered healthy in the oil & gas midstream space.

I would caution that there are special items creating noise regarding Energy Transfer's DCF generation, particularly its favorable inventory valuation adjustments and minimum volume commitment related payments from its clients. Those MVC payments are lumpy, in the sense that when one of ETP's clients doesn't meet the volume agreement, ETP gets a payment in the future to offset the loss of revenue.

Something to keep in mind as its coverage ratio was probably lower than reported (for instance, $30 million in non-reoccurring EBITDA from its midstream division could be taken out of its Q2 DCF stream). Considering there is always so much noise in a complex midstream family's financial reports (new projects coming online, changes in volume and margins, volatile energy prices, impacts from weather) that coverage ratios should be viewed more so as a trajectory, not a static figure.

Energy Transfer's net income fell to $292 million in Q2 from $364 million in Q1 yet its adjusted EBITDA rose from $1.41 billion to $1.6 billion. A $180 million non-cash loss in Q2 stemming from the probable sale of Sunoco LP's retail business and the deferred tax impact from the ETP-SXL merger pulled down Energy Transfer's Q2 income, which is why its adjusted EBITDA was much higher sequentially.

Noise aside, when it comes to covering its distribution, ETP has got its unitholders covered. However, it has gotten a little ahead of itself when it comes to funding its growth ambitions.

How to cover growth spending

Energy Transfer generated $250 million in excess cash flow after covering its distribution (this includes covering corporate, operating, interest, and maintenance capex) during the first half of 2017. Versus the $2.7 billion spent on organic growth projects (leaving consolidation efforts out for simplicity's sake), it is clear ETP is leveraging its balance sheet to fund growth endeavors.

This is what that looked like. On a consolidated basis, Energy Transfer Partners' (and its subsidiaries) current assets moved lower by $343 million during 1H while its current liabilities grew by $786 million. When merging its long-term debt with its long-term notes payable, ETP's long-term debt was basically flat (increased by $38 million) from the end of 2016 to the end of June 2017.

For the second half of the year, Energy Transfer forecasts it will spend $2.2 billion on growth capex. This is partially why ETP decided to sell off a portion of the embattled Rover pipeline which reduced its expected 2H capex. A solid project that is very much needed in order to increase takeaway capacity out of Appalachia, but one that has run into so many hurdles, regulatory and operational.

Many commentators seemed to question Energy Transfers' reasoning for moving forward with a sale (with the price tag also being questioned) but really it was a risk mitigation strategy.

ETP sold a 49.9% stake in HoldCo to funds owned by Blackstone Group LP (NYSE:BX) for $1.57 billion in cash. HoldCo owns 65% the Rover pipeline, a 713-mile project that will route 3.25 Bcf/d of dry gas produced in the prolific Marcellus/Utica plays in Appalachia to consumers in the Midwest and Canada (through the Vector system). ETP retains a 50.1% stake in HoldCo.

On top of that cash infusion, "Blackstone investment will reimburse ETP for its pro rata share of the construction costs incurred by ETP through the closing date in connection with the Rover Pipeline, specified amounts of future construction costs and certain additional payments to ETP."

The deal is expected to close in Q4 2017 and will be used to pay down debt and cover its growth ambitions. Investors should note that Energy Transfer has effectively removed a large portion of its construction cost risk by having Blackstone cover its share of the Rover expenditures until then. Plus, there are unspecified additional payments coming in at a later date.

Looking at some growth projects

Energy Transfer Partners plans to turn the Rover pipeline online later in 2017, with Phase 1A being closely followed up by Phase 1B. That will provide multiple catalysts for ETP, as turning the Rover project online means other developments can come online like the Revolution project (set to be completed in Q4 2017) on top of the payments from Blackstone and the roll-off of growth capex.

The Revolution development includes building out a 100-mile rich gas gathering system in Pennsylvania with 440 MMcf/d of capacity, originating in Butler County, PA. A cryogenic gas processing plant is being built in Western PA with gas gathered from the new system being routed to the facility.

Also, a fractionation plant is being built at its (previously SXL's) Marcus Hook complex in Pennsylvania with an original start-up date set for Q2 2017 (same as the cryogenic plant, but it isn't clear if those facilities are operational yet). All this is expected to cost $1.5 billion.

Basically, Energy Transfer is going to gather dry gas and NGLs (part of the rich gas production stream) produced in Appalachia from the Marcellus and Upper Devonian shale plays and send that to its new cryogenic processing plant (where dry and wet gas will be separated), with NGLs going to its new fractionator for processing while dry gas will be routed to buyers through the Rover pipeline. A comment from ETP:

"The residue gas from this [cryogenic] plant will be delivered into ETP’s Rover interstate pipeline for deliveries to downstream markets. The natural gas liquids will be delivered to [Energy Transfer Partners'] Mariner East pipeline system for delivery to domestic and export markets."

Growth projects beget additional growth projects.

Side notes

On the topic of synergy, management sees the SXL-ETP merger saving the firm $200 million annually by 2019. Simplicity saves cash.

More interesting, when asked whether or not Energy Transfer Equity was considering trading in its IDRs for units of Energy Transfer Partners, Kelcy Warren (CEO/Chairman of ETP, Chairman of the general partner of ETE) said:

"Yes, we have thought about that. And we are looking at all of our options right now of what would be, if there is an interim step that could be done sooner. So yes, we’d look at that, yes."

Getting rid of its IDRs would be a step in the right direction to continue Energy Transfer's simplification process.

Final thoughts

Lots of noise to pick through, but overall a good quarter for Energy Transfer Partners LP and Energy Transfer Equity LP (coverage ratio grew from 0.86X to 0.96X, but needs to get back over 1.1X). There are a lot of growth projects Energy Transfer Partners LP is pursuing but the Rover project really stands out due to the various synergies the midstream family will realize.

Investors should note that Energy Transfer Partners LP is biting off a lot with its numerous growth projects in the works (on top of a material debt burden), something that needs to be closely monitored going forward.

Energy Transfer Partners LP is a solid firm, and in light of its high yield, it seems capital appreciation may be on its way. Turning the Rover line online will help speed that process along.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is source I found from another site, main source you can find in last paragraph

Source : https://seekingalpha.com/article/4097231-energy-transfer-partners-fully-covers-11-percent-yield

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