Yahoo Finance This High-Yield Stock Had a Nearly Disastrous 2017 (but 2018 Should be Much Better)
Last year was a challenging one for pipeline company Energy Transfer Partners (NYSE: ETP). From the collapse of an asset sale to a delay in completing several major expansion projects, the company had to overcome many obstacles, paying a high price to do so. Because of that, it lost more than a quarter of its value last year and now yields a jaw-dropping 11.7%.
However, while the company's struggles forced it to make several tough choices last year, those decisions have set it up for a potential rebound in 2018.
Image source: Getty Images.
Costly delays
Energy Transfer Partners initially expected 2017 to be a good year because it had several expansion projects slated to enter service, including its controversial Bakken Pipeline. However, that pipeline didn't start commercial service until June, because the company didn't get a required permit to finish construction until February. That delayed the anticipated cash flows by several months and also pushed back the closing of two financing transactions involving the project until mid-February. Those setbacks put the company in a bind because it needed those funds to finish this project as well as some of its other expansions.
Because the company needed money, it was working on a deal sell $5 billion in assets to a private equity fund managed by Blackstone Group (NYSE: BX). However, that transaction fell through, leaving the company scrambling for cash, which led it to sell $568 million in units to its parent company, Energy Transfer Equity (NYSE: ETE), in early January. However, with a multibillion-dollar expansion program to finance, and a debt-laden balance sheet, it still needed more money.
It secured some of that cash in mid-August when it sold another $1 billion in equity via a public offering. However, it paid a high price because it sold those units at a rock-bottom valuation, which only added to the cost after factoring in the money it sends to Energy Transfer Equity via the costly incentive distribution rights. Meanwhile, the company would go on to secure even more money in October, when it sold a 32.44% stake in its troubled Rover Pipeline to an affiliate of the Blackstone Group for $1.57 billion. Finally, in November the company raised another $1.48 billion via a preferred stock offering.
Image source: Getty Images.
Starting to gain traction
While those financings didn't come cheap, it did provide Energy Transfer Partners with the money needed to continue work on its massive slate of expansion projects, with the company pre-funding a majority of 2018's spending. Because of that, the pipeline giant is on pace to place $10 billion of major growth projects into service by early next year. Recently completed projects have already started moving the needle and helped the company finally turn the corner and begin growing cash flow once again. Meanwhile, upcoming expansions should fuel significant cash flow growth in the coming year, giving the company more money to support its lucrative distribution to investors.
That growing cash flow stream should also help ease concerns surrounding the company's financial situation. While its leverage ratio entered 2017 at a concerning 5.74, it had fallen to 4.92 by the third quarter. Meanwhile, it could be down to a much more comfortable 4.0 by the end of 2018 thanks to anticipated earnings growth. As leverage comes down, it should help lift one of the weights that pushed down Energy Transfer's valuation.
Putting a tough year in the rearview mirror
Last year proved to be a challenging one for Energy Transfer since a delay in completing two major projects forced it to pay up to get the money it needed to finance other expansion projects. However, the company did get the funding to keep building, which sets it up to cash in on those projects over the next year as they enter service. As that happens, it should slowly melt away the company's financial concerns, giving investors more confidence in the long-term sustainability of its lucrative distribution, which could help reverse last year's disastrous performance.
More From The Motley Fool
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
