Morningstar | Energy Transfer's Cash Constraints Ease With Earnings Growth and Consolidation
We are reaffirming our $28 per unit fair value estimates for Energy Transfer Partners and $22 per share fair value estimate for Energy Transfer Equity after both reported second-quarter earnings. We are reaffirming our no-moat and stable moat trend ratings.Results in the first half of 2018 suggest both Energy Transfer entities are on track to meet our full-year expectations. ETP earnings and cash flow were up markedly, as we expected, with adjusted EBITDA climbing 32% to $3.9 billion and distributable cash flow to partners climbing 36% to $2.5 billion. ETE reported $803 million distributable cash flow in the first half, up 79% from the first half of 2017.
The jump in earnings is primarily due to the Bakken pipeline, which went into service in mid-2017, and the ramp-up of the Rover gas pipeline. We expect a full year of Rover and Bakken service plus a ramp-up of Mariner East 2 will result in 7% full-year EBITDA growth for ETP.
Our fair value estimate for ETP remains tied to ETE's fair value estimate based on our assumption that the two will complete their proposed consolidation. We think ETP unitholders should accept ETE's 1.28 unit exchange offer given concerns about leverage and the distribution. Although ETP unitholders will suffer a substantial distribution cut, we expect the consolidated entity will be able to resume distribution growth immediately, whereas ETP faced the prospect of no distribution growth for several years.
Management reiterated its plan to spend $4.5 billion in capital investment this year at ETP while also reducing leverage. As capital investment winds down in 2019, the combined Energy Transfer entity should realize a substantial improvement in its credit profile. We expect ETP will continue diverting excess cash to debt reduction and don't expect a change in the $0.565 per unit distribution before the consolidation closes. We also think ETE will maintain its $0.305 per unit distribution through the deal close.
Energy Transfer Partners, through its subsidiaries, conduct activities such as natural gas operations; and interstate natural gas transportation and storage; and crude oil, natural gas liquid and refined product. The company's segment includes: Intrastate Transportation and Storage, which owns and operates a natural gas open-access interstate pipeline network; Midstream, which consists of natural gas gathering, compression, treating, processing, storage, and transportation; NGL and Refined Products Transportation and Services, which transport, store and execute acquisition and marketing activities utilizing a network of pipelines, storage and blending facilities.
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