I had the opportunity to attend the recent Energy Transfer Partners (ETP) and Energy Transfer Equity (ETE) analyst day in Dallas. I came away with several broad messages from the presentations and ensuing Q&A session. In this article, I will offer my takeaways, add some color to the messages, and provide analysis. My article is focused primarily upon Energy Transfer Partners.
Energy Transfer Partners -- One Year Price and Volume
(click to enlarge) Courtesy of bigcharts.com
What's the Story?
The primary purpose of an Analyst Day is for the management team of a company to "tell a story" to the brokerage / investment analyst community. The narrative explains where the company has been, what it is doing now, and where management plans for it to go.
Energy Transfer management offered the following broad storylines:
- No more deals in the foreseeable future. Management is focused upon digesting the numerous business acquisitions and capex projects they have already completed or are underway.
- Asset divestitures are planned in order trim away non-core businesses and raise cash
- Entity restructuring is a prime mover to obtain corporate simplification and tax efficiency
- Management repeatedly announced their desire to raise the cash distribution in 2013
Adding Color to the Narrative
Over the past several years, Energy Transfer management has embarked upon a series of mergers, acquisitions and divestitures that have transformed the company's footprint. These includes the acquisition of Louis-Dryfus holdings, a merger with Southern Union, the outright purchase of Sunoco, and large capital build-out projects in the Eagle Ford shale gas and downstream NGL space. In addition, Trunkline, a major U.S. natural gas pipeline and part of the Southern Union Gas deal, is planned to be converted from natural gas to crude oil.
In 2008, ETP was primarily a Texas-centered NGL transportation company. Today, the company has expanded into downstream NGL businesses, greatly broadened their geographic exposure, entered the crude oil and refined oil products businesses, and diversified into the Eagle Ford rich gas and gas liquids transportation plays.
No More Deals
Energy Transfer CEO Kelcy Warren made it clear he does not plan to do additional merger and acquisition deals. He believes it's time to simplify and optimize what's already been done or is already underway. This means generating synergies via the transfer of Southern Union operations to Energy Transfer Partners, integrating the Sunoco crude and products businesses within the Energy Transfer family, and wrapping up the numerous pipeline and NGL fractionator capex projects initiated over the past year or so. On-time on-budget projects and forward operational efficiencies are the first order.
Trim Non-Core Businesses
There are a number of business interests or assets that were acquired as part of the aforementioned "big deals" that are not central to Energy Transfer. These will be sold, presumably for cash.
A large chunk is the AmeriGas equity units received partly in consideration for ETP's sale of its propane business. Beginning in 2013, ETP can begin to sell these units on the open market. It is their intent to do so in a responsible and controlled manner.
Other bits and pieces from the Louis-Dryfus acquisition, Southern Union, and Sunoco deals will also find their way to the auction block. Proceeds will be used to finance ongoing capital projects and backstop debt.
Notably, it does not appear that ETP management plans to divest of the Sunoco retail service station business. I was a bit surprised to learn this. However, I can offer that the retail marketing business tends to be a reasonably stable, cash cow enterprise. Assuming Energy Transfer can harness tax efficiency within their MLP structure and retain sound, local management to operate the facilities, this appears to be a fair decision.
One of the most complicated forward activities will involve simplifying the corporate structure. The ETE / Southern Union dropdown and creation of ETP Holdco Corp has been the first step in the process. I will not go into all the planned machinations here. Frankly, it's not completely clear to me what is planned exactly going forward. I can state that the objective is to ring-fence all assets and businesses as tax-efficiently as possible and move them under the ETP umbrella, while transforming ETE back into a pure General Partner. Here's a diagram of the current state:
Source: Energy Transfer Analyst Day Presentation
At this point, my understanding is that ETP Holdco will eventually go away. The intent is to ultimately roll this corporation 100 percent into Energy Transfer Partners.
Boost the Cash Distribution to Unitholders
A recurring theme was insisting that the unitholder distribution must be raised. The expectation is that this will happen in 2013. The increase is intended to be small, perhaps only a few cents. However, it was encouraging that senior management emphasized the point. As longtime ETP unitholders know, a payout increase was anticipated in 2011 but it never materialized.
To be fair, that potential increase was offered by ETP execs in late 2010. As 2011 and 2012 unfolded, the "deal dam" busted open and reshuffled the operational and financial deck.
Indeed, I will be quite discouraged if ETP management does not make good on their intent this time around.
For investors looking to benchmark Energy Transfer financials, two specific key metrics were identified:
- Achieve and maintain a distribution coverage ratio of 1.05X
- Target Debt/Adjusted EBITDA ratio of 4.00X to 4.25X
The Bottom Line
My view is that management took a good shot to clarify the state of affairs. If I were to sum it up, here's my take:
The investor must decide if he / she trusts the management team of ETP to get results. The pieces of the puzzle are now laid out on the table, and it's high time to put them together. No more pieces to be obtained; no more excuses. It's time to execute.
Energy Transfer has spent the last couple of years building up the business via a number of large acquisitions, mergers and capital expansion projects. This phase is complete. Management will now focus upon optimizing and rationalizing these assets and businesses. Part of the process will be to rearrange and construct all the parts and pieces into an efficient fit-for-purpose financial and tax entity.
ETP management recognizes that investors have been overdue increased distributions. Compounding matters, the underlying unit price has gone nowhere. It is the stated intent of company management to improve the unitholder cash distribution in 2013, even if the increase is modest. Furthermore, an increase is intended to be a future trend, not a one-off deal.
It was acknowledged that the business plot has been too complicated. The plethora of assets coming and going, coupled with an evolving company structure has proven challenging even for an experienced analyst when attempting to create a strong, quantifiable model for Energy Transfer's future performance.
Overall, the story line sounds reasonable. Even though natural gas prices are at a trough, a significant breakout is not required for the company to make money. At such time natural gas and NGL prices do rebound, Energy Transfer will be well-positioned to capitalize on this without undue additional investment.
Here's my report to you on a couple of adjunct items.
In the future, I believe that Energy Transfer management could do themselves a favor by offering investors forward financial guidance. Looking backward, it could have been construed as a combination of management's difficulty in projecting changing commodity market conditions and too many moving parts.
Looking forward, if the recent business development activity has truly transformed the company into a more stable, long-term, fee-based cash cow, then providing forward guidance is reasonable. It would go a long way to encourage current and prospective MLP investors to invest: this group generally seeks relative safety and income.
Agency Credit Ratings
Currently, ETP is rated investment grade (Baa3 / BBB-) by the three major rating agencies. Moody's and S&P have affixed a "Stable" outlook. Fitch has a "Negative" outlook. Management believes that the Fitch outlook is more a function of timing than substance. This assessment appears reasonable given the sheer volume of recent financial activity. An agency must delve into the nuts and bolts of Energy Transfer's business before offering a clear assessment. Two agencies have done this. Fitch plans to complete this work in late 2012 or early 2013. I will continue to monitor this.
Disclosure: I am long ETP.