There’s nothing like taking a punch. Jim Cramer wrote up a piece December 19, “Energy Transfer Partners: Why You Shouldn’t Worry, (Real Money)” (1) calling into question our analyst team and independence. Valuentum is offering new perspectives in the industry, and the old guard may not like it that much. Not only has the ETE (ETE)/ETP (ETP) Group CFO stepped down since that article, shattering confidence, but units of both Energy Transfer Equity and Energy Transfer Partners have fared no better, still but a fraction of their former selves.
The headline numbers from the fourth-quarter report of Energy Transfer Equity and Energy Transfer Partners were horrible. Both entities missed consensus expectations, and investors have to get over the idea that earnings for these companies don’t matter. In a world of sub-$30 per barrel crude oil and contracting credit, the gushers that have traditionally fed financially-engineered distributions and the artificial pricing paradigms on the basis of obsolete dividend growth models are no more.
Investors have wised up, but the industry is holding on.
At Energy Transfer Partners, the fourth-quarter’s operating-income contribution for the year was negligible at less than $200 million, and the company recorded a $82 million loss in the period. Reported operating income plus depreciation, depletion and amortization in the period, or reported EBITDA, was $665 million in the fourth quarter and $4.19 billion for the year. Backing out impairment losses, these numbers are $1 billion and $4.53 billion. Our measure of Energy Transfer Partners’ leverage based on currently-available information or long-term debt to reported EBITDA at the end of 2015 came in at 6.3x, but this excludes any short-term debt and is not netted for cash. Energy Transfer Equity ended the year with nearly $36.8 billion in long-term debt, up from $29.4 billion in 2014. With reported EBITDA of $4.82 billion for the year, after backing out impairment losses, Energy Transfer Equity ended 2015 roughly 7.6x leveraged (as measured by long-term debt to reported EBITDA).
Management provides so much segment detail in the press releases that it is obvious that the GAAP cash flow statement is one that it doesn’t like to share. After all, the cash flow statement tells the real story. Valuentum does not recognize the industry’s metric of “cash flow” as it excludes key expenses and cash outlays associated with growing net income, which itself is a component of the industry’s definition of “cash flow.” We’re waiting for the release of ETE’s and ETP’s 10-K where we can gain greater insight into movements on the actual cash flow statement, particularly on how cash flow from operations performed and the extent of both entity’s total free cash flow burn for the year. It is clear that investors are no longer “buying” into the industry’s definition of “cash flow,” which in many cases is so far away from reported earnings that it’s hard to believe.
The quarterly conference call is tomorrow at 8amCT. Both Energy Transfer Equity and Energy Transfer Partners are indicated down after hours. We hope that the pain ends soon, and we hope they both find a way to catch a bid in trading tomorrow, especially for the sake of investors who believe the long term may be brighter.
(1) http://realmoney.thestreet.com/articles/12/19/2015/energy-transfer-partners-why-you-shouldnt-worry