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Ray Merola

Ray Merola

I recently retired from Shell Oil after serving over thirty years in the energy industry.  My career was concentrated in the downstream business; serving various…

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Energy Transfer Partners Starting to Catch a Tailwind

Energy Transfer Partners Starting to Catch a Tailwind

Energy Transfer Partners (ETP) investors have been saddled with flat cash distributions and channeled unit prices for a protracted period of time.  This may be about to change.

Energy Transfer Partners
                         Energy Transfer Partners (ETP) – three-year price and volume
Energy Transfer is a Texas-based company that began in 1995 as a small intrastate natural gas pipeline operator and is now one of the largest and most diversified investment grade master limited partnerships in the United States. The Energy Transfer entities have grown from roughly 200 miles of natural gas pipelines in 2002 to approximately 69,000 miles of natural gas, natural gas liquids (NGLs), refined products, and crude oil pipelines today.

Energy Transfer has an outsized 8.25 percent distribution yield, well above most MLP peers.  However, the payout has not been raised in some three years, to the dismay of many unitholders.

Compounding matters, the underlying unit price has remained relatively static over the same period, channeling between the low $40s and mid-$50s.  For most of 2012, the units have traded to the low end of the range.

A complex business narrative has contributed to the weakness.  During the past several years, Energy Transfer has transformed itself from a Texas-centered natural gas pipeline play into diversified hydrocarbon downstream company.  Company management has accumulated significant assets located throughout much of the eastern half of the U.S.  Here are the highlights of ETP's metamorphosis:

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•    Divest Propane Business: In January 2011, ETP closed on its sale of its retail propane business to AmeriGas Partners LP (APU). In consideration for the business, Energy Transfer Partners obtained $1.32 billion in AmeriGas shares and $1.46 billion in cash.
•    Purchase Assets from Southern Union: In conjunction with General Partner Energy Transfer Equity's (ETE) purchase of Southern Union Company, ETP entered into an agreement with ETE to acquire SUG's 50 percent interest in Citrus, which owns 100 percent of the Florida Gas Transmission (FGT) pipeline system.  The Panhandle Eastern transportation assets were also part of the deal.
•    Eagle Ford Shale Projects: ETP expects to spend about $1.25 billion on a number of projects that expand the company's footprint in the Eagle Ford shale region. These projects include pipeline and natural gas processing plant construction. The bulk of the projects are planned for completion in 2012 and early 2013.
•    Lone Star NGL Venture: In May 2011, Energy Transfer Partners and Regency created a joint venture called Lone Star NGL (70 percent owned by ETP). This venture now operates NGL storage, fractionation and transportation facilities acquired from Louis-Dreyfus. The partnership has announced plans to build an additional 100,000 bbl/d fractionation plant at Mont Belvieu, Texas, to be completed in early 2013. The cost is anticipated to be $400 million.  On top of that, Lone Star recently completed a 570-mile natural gas pipeline spanning the State of Texas, called the West Texas Gateway Project. The cost was about $920 million.
•    FEP and Tiger Pipelines: ETP is a 50-percent owner in the Fayetteville Express pipeline and a 100% owner of the the Tiger pipeline. These pipelines, which began operations in late 2010 were built under budget and faster than proposed. Now operational, the FEP has take-or-pay volumes locked in for 93 percent of its capacity via 10 and 12-year lease agreements. Meanwhile, 100 percent of the Tiger pipeline capacity is under contract for 10 and 15-year agreements.
•    Other Pipeline Expansion Projects: In September 2011, Energy Transfer Partners placed into service the Freedom and Liberty pipelines. These smaller projects expanded its existing pipeline system. The ancillary 130-mile Justice pipeline was completed this month, ahead of schedule. 
•    The crown jewel was the $5.1 billion acquisition of Sunoco, Inc.  This included its interest in Sunoco Logistics Partners L.P. (SXL) and all of Sunoco's retail service stations.

These acquisitions have enabled Energy Transfer to become a significant provider of services to producers and consumers of natural gas, NGLs, crude oil, and refined products.  

Here is a map of the new Energy Transfer organization.  

new Energy Transfer organization

So what does this all mean?

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Well, ETP management stated that it's time for the deal-making to stop and for the assets to be rationalized and made more efficient.  Nonetheless, the dizzying pace has left even seasoned Wall Street analysts scratching their heads as to how to model cash flows going forward.

On November 14, management organized an Analyst Day presentation and Q/A session to help explain their strategy to the major investment houses.  Company management outlined their go-forward vision as well as repeatedly indicated the cash distribution to unitholders will be increased in 2013.  The initial reaction, both by brokers and the market, has been favorable.  Units have moved up from an intraday low of $41 to comfortably perched above the simple 200-day moving average of $43.  A sound third quarter earnings report complimented the Analyst Day event.

One month price and volume
          Energy Transfer Partners (ETP) – One month price and volume
Investors seeking a high-yield, tax-advantaged distribution may wish to consider Energy Transfer Partners units.  The investment thesis is largely predicated upon the ability of senior management to execute and deliver results given their expansive new set of assets.  If successful, the new Energy Transfer organization should generate more ratable, fixed-fee income across a much wider geographic and downstream hydrocarbon asset base.  The financial statements are generally sound.  Debt appears manageable, and operating cash flows are good (and should improve further).  The credit rating agencies have maintained an investment grade seal upon Energy Transfer Partners throughout their shopping spree.

Considerable work is ongoing to efficiently manage the tax consequences of the recent deal-making.  The plan, while complex, is workable and will ultimately result in a simplified structure whereas ETP will hold the assets, and Energy Transfer Equity (ETE, the sister Energy Transfer company) will focus its MLP General Partner status.

By. Ray Merola

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