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How Dakota Access Pipeline Ruling Adds to Energy Transfer’s Woes

24/7 Wall St. logo 24/7 Wall St. 8/6/2020 Paul Ausick

a man talking on a cell phone © Provided by 24/7 Wall St. Midstream energy infrastructure (oil and gas pipelines) company Energy Transfer L.P. (NYSE: ET) reported second-quarter results after markets closed Wednesday, after receiving a mixed result from the U.S. Court of Appeals in a case involving the company's Dakota Access Pipeline (DAPL) system. Energy Transfer owns 38.5% of the DAPL and is the pipeline's operator.

In the second quarter, Energy Transfer posted adjusted earnings per common unit of $0.13, nearly 50% lower than the consensus estimate of $0.48 per unit and 60% lower than earnings in the second quarter of last year. Revenue of $7.3 billion for the quarter missed by more than a third and came in 47% lower than in the prior-year period.

Distributable cash flow of $1.27 billion was 26% lower than in 2019 and was attributed to lower volume and market prices due to the COVID-19-related economic downturn. Distribution coverage was 1.54x, yielding $448 million in excess of distributions.

Based on the uncertain pace of an economic recovery, the company lowered its estimate of full-year adjusted earnings before interest, taxes, depreciation and amortization to a range of $10.2 billion to $10.5 billion. Adjusted EBITDA for the first six months of the year totaled $5.07 billion, down from $5.56 billion in the first six months of last year.

The impact of the appellate court's ruling is a bit less clear-cut. The injunction shutting down the pipeline was stayed by the court, allowing DAPL to continue operating, and it requires the lower court to determine if it should have issued an injunction in the first place. It could take a few months to satisfy this requirement.

The bad news for Energy Transfer has denied DAPL's motion to stay the lower court's order that wiped out DAPL's easement for the pipeline to cross the Missouri River at Lake Oahe. In an update published Thursday morning, analysts at Morgan Stanley noted that the Appeals Court said that, among other flaws, the DAPL's owners "have failed to make a strong showing of likely success on their claims that the district court erred in directing the [Army Corps of Engineers] to prepare an environmental impact statement [EIS]."

This part of the ruling is a win for the Standing Rock Sioux tribe and others that have been fighting the Corps' easement allowing the pipeline to tunnel under the Missouri River near the Standing Rock Reservation.

Morgan Stanley's analysts think that the district court eventually will issue an injunction requiring the pipeline to be shut down until a review of the litigation "with respect to the need" for the Corps to issue an EIS. DAPL is likely to seek a stay of such an order, however, in Morgan Stanley's opinion, a stay is not likely to be granted because the district court has now been ordered to follow "the proper methodology" to issue the injunction.

The analysts estimate that $300 million to $400 million of Energy Transfer's 2019 adjusted EBITDA is at risk if DAPL were to be shut down and that "the valuation impact of a permanent decommissioning [of the DAPL on Energy Transfer would amount to] approximately $1.50 per common unit."

In the noon hour Thursday, Energy Transfer common units traded down about 2.6%, at $6.67 in a 52-week range of $3.75 to $6.84. The consensus price target on the common units is $10.79. Energy Transfer's annual dividend yield is $1.22, or 17.06%.

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