Energy Transfer Underperforms

Pipeline operator Energy Transfer Partners L.P. (ETP - Analyst Report) announced disappointing third quarter 2011 results, hurt by weak Intrastate Transportation and Storage business and higher operating expenses.

The owner of the biggest intrastate pipeline system in Texas reported loss per unit of 19 cents, as against the earnings per share of 5 cents in the prior-year quarter. The results were way below our earnings estimate of 28 cents.

Quarterly revenues of $1,715.3 million missed our projection of $1,888.0 million. However, comparing year over year, sales shot up 32.9% from $1,290.6 million, aided by strong natural gas operations.

Quarterly Cash Distribution

Last month, Energy Transfer announced third quarter distribution of 89.375 cents per unit ($3.575 per unit annualized), which remains unchanged from the year-earlier and previous quarter distributions. The distribution is payable on November 14, to unit-holders of record on November 4.

EBITDA & Operating Income

Adjusted EBITDA for the quarter was $404.2 million, compared with $280.5 million in the year-ago quarter.

Operating income of $272.3 million escalated 30.8% from the third quarter of 2010, reflecting significant growth in Energy Transfer’s Interstate Transportation and Midstream business units.

The partnership withdrew approximately 8,661.4 million metric British thermal unit (mmbtu) from the natural gas storage inventory during the quarter, as against a much lower, 7,459.9 mmbtu, withdrawal during the corresponding quarter last year.

Distributable Cash Flow

Energy Transfer Partners reported distributable cash flows of $266.1 million in the quarter, up from $160.5 million in the prior-year quarter.

Capital Expenditure

During the quarter, maintenance capital expenditure totaled $31.4 million, up 18.9% year over year.

Balance Sheet

As of September 30, 2011, Energy Transfer had long-term debt (less current maturities) of $7,652.3 million. Debt-to-capitalization ratio was 57.0%.

Our Recommendation

We expect Energy Transfer Partners to have a challenging time ahead due to the lingering effects of the weak natural gas market that would dilute growth prospects of the rapidly expanding natural gas liquids business. Moreover, the uncertain macro environment and cost overruns on expansion projects remain major areas of concern.

Counterbalancing these negative aspects, we expect the partnership to drive distribution growth in the coming months aided by multiple acquisitions and joint ventures, organic growth, strong volume expansion and modest price increases.

Energy Transfer Partners –– which competes with other large-cap pipeline master limited partnership peers like Enterprise Products Partners L.P. (EPD - Analyst Report), Kinder Morgan Energy Partners L.P. (KMP - Analyst Report) and Plains All American Pipeline L.P. (PAA - Analyst Report) –– currently retains a Zacks #3 Rank (short-term Hold rating). Longer-term, we maintain our Neutral recommendation on the partnership.

Read the full analyst report on EPD

Read the full analyst report on PAA

Read the full analyst report on KMP

Read the full analyst report on ETP