When I look into the operations and investment potential of the inter-related Energy Transfer Partners LP (ETP) and Energy Transfer Equity LP (ETE) the term "hot mess" pops into my mind. Google "hot mess" and you get a variety of definitions, but in this case I see a pair of companies with a growing portfolio of valuable assets, but those assets are not bringing competitive returns to investors.
Note: MLP companies such as Calumet Specialty Products have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
Sorting Out the Parts
Energy Transfer Equity, hereafter referred to as ETE, is primarily the general partner of Energy Transfer Partners - ETP. However, recent acquisitions by the Energy Transfer duo have muddied up the waters of how the two are organized. Here is a breakdown of the major holdings for the two.
- ETP holds the midstream Energy Transfer assets which are primarily natural gas gathering and transportation pipelines, treating and processing assets, and storage facilities.
- ETP holds the general partner, incentive distribution rights - IDRs, and 32.4% of the LP units of Sunoco Logistics Partners L.P. (SXL), acquired with the Sunoco acquisition completed in the fourth quarter of 2012.
- ETE holds the GP and IDR rights of ETP plus about 50 million LP units.
- ETE holds the GP and IDR rights of Regency Energy Partners LP (RGP) and 26 million of the LP units.
- ETP and Regency Energy Partners jointly own the Lone Star NGL storage, fractionation and transportation assets on a 70/30 split.
- The corporate parts of the recent Sunoco and Southern Union purchases have been dumped into a holding company called Holdco, Inc. ETP owns 60% of Holdco and ETE the remaining 40%.
Lots of Growth, But Flat Results
The Energy Transfer companies have been adding assets at a rapid clip through both expansion and acquisition. The growth can be seen through the increase in outstanding units. From the end of 2009 through the end of 2012, the number of ETP units increased by 48% and the number of ETE units grew by 20%. Equity issues are usually accompanied by a similar amount of new debt, so these companies have invested a lot of capital over the last four years.
Yet with all of the growth in assets, ETP has not increased the quarterly distribution rate since the fourth quarter of 2007. ETE had been increasing its dividend pretty steadily until the second quarter of 2011. The penny or 1.5% increase for the 2012 fourth quarter distribution was the first hike for ETE in 6 quarters.
In spite of the flat distribution rates, the two companies managed to payout more than reported distributable cash for both 2011 and 2012. For 2011, ETP reported DCF of $1.153 billion and $1.239 billion was paid to partners and non-controlling interests. For 2012, the numbers were $1.488 billion and $1.595 billion, respectively. ETE reported $511 million of DCF and $545 million of total distributions in 2011. For 2012 the numbers were $668 million and $704 million.
Over the last two years, ETP and ETE have not been able to turn asset growth into distribution growth, which is the mechanism for an MLP to let investors participate in the growth. Two items from the recent fourth quarter conference call caught my eye/ear. The first is from the concluding remarks in of the prepared materials:
"In closing, we stated in our goals at our November 2012 investor conference to growth ETP's distribution rate in 2013 to simplify our organizational structure and to extract more value from our expanded asset base."
The other was an answer to an analyst question concerning the possibility of selling off the Sunoco retail business:
"...And also as we've talked about before, just the fundamental risk we take does not work to exit that business. So those businesses do not trade for a multiple that would come even close to being accretive to our unitholders to exit the business." Emphasis added.
My take away from the Sunoco comment is that ETP possibly paid too much for all of Sunoco to get their hands on the very attractive Sunoco Logistics Partners.
Another line of questioning concerned when the Energy Transfer companies expect to get back to a 1.0 to 1 coverage of the distributions. So before any dividend increases come along for ETP investors, the company must first get to a place where the current payout is covered by distributable cash flow. 2013 should be the year where ETP and ETE show that the two companies can start to ring per unit cash flow growth out of the spending spree assets acquired over the last few years. At the current distribution yields of 7.6% for ETP and 4.5% for ETE, I see no compelling value in these midstream MLP companies compared to other MLP investment options.