Pipeline giant Energy Transfer (NYSE:ET) got another dose of bad news this week. A U.S. district court judge ordered the company to temporarily shut down and drain its Dakota Access Pipeline (DAPL) by August 5th, pending the outcome of an environmental review. The news sent shares of Energy Transfer and the pipeline’s other investors into a tailspin.
The news was a big blow for the company, one of several it has encountered this year. These issues have pushed the MLP’s unit price down roughly 50%, driving its dividend yield to its current level above 18%. A payout that high is usually a warning sign that a cut is right around the corner. The probability of that outcome has certainly increased following the shutdown of DAPL.
A big blow in many ways
Energy Transfer currently owns a 36.37% stake in the Bakken Pipeline system, which includes the 1,172-mile Dakota Access line that transports oil from North Dakota to Illinois and the 675-mile ETCO pipeline that ships oil from Illinois to Texas. The system started commercial service in June of 2017, following a series of delays due to the controversies surrounding DAPL’s route. The system has the capacity to transport 570,000 barrels of oil per day (BPD), though Energy Transfer has been seeking support to expand it up to 1.1 million BPD.
Energy Transfer and its fellow owners have been generating a steady stream of cash flow since the system started three years ago. That income stream will dry up — at least temporarily — as the DAPL undergoes its environmental review. In addition to that cash flow hit, Energy Transfer and its partners will need to spend more money on their legal defense and any related costs. The companies have already filed a motion to stay in hopes that oil will continue to flow through the pipeline.
On top of that, the partners might need to inject equity into their venture because of a backstop agreement with lenders following a $2.5 billion bond offering last year. Refining giant Phillips 66 (NYSE:PSX), which owns a 25% stake through its MLP Phillips 66 Partners (NYSE:PSXP), disclosed that it might need to contribute as much as $631 million in equity as a result of the pipeline’s shutdown. Given Energy Transfer’s larger stake, it might need to kick in even more money. When combined with the lost income and additional legal fees, that cash payment could significantly impact Energy Transfer’s ability to maintain its current dividend level.
Another setback in a trying year
The court’s ruling on DAPL is just the latest in a series of blows to Energy Transfer’s earnings. The company entered the year under some pressure due to the roll off of legacy pipeline contracts, and some margin compression as a result of more competitive market conditions. Because…
Read More: Is Energy Transfer’s 18%-Yielding Dividend in Trouble Now that Dakota Access Must