The month of May has not been kind to Energy Transfer Partners (ETP) investors. The unit price has dropped over 8 percent over the past two weeks to close at $49.73 last night.
Energy Transfer Partners (ETP) YTD price and volume
Is there a fundamental problem? Time to hit the eject button?
Let's examine the confluence of several recent factors that appears to have affected the security price:
- Disappointing 1Q earnings report
- Chatter about changes to MLP tax structure
- Talk of competing pipeline by Enbridge
- Downgrades from several brokerage houses
- Ex-Distribution date
- Dilution March share offering
- Weak technical chart
Disappointing 1Q earnings report
The scoop: Energy Transfer Partners had a significant "miss" on their first quarter earnings. More importantly, the EBITDA and DCF (Distributable Cash Flow) also missed. Revenues were up 6 percent QvQ, but missed analyst forecasts. The headline numbers were pretty foul. A 31-cent miss on a $1.02 consensus target is not good.
Analysis: Having reviewed the numbers and listened to the management earnings conference call, here are my views:
Yes, it was a missed quarter. However, the underlying fundamentals and investment thesis remains intact. The first quarter earnings and EBITDA shortfall were due to a host of issues, primarily storage economics and weather. None appear to be cause for panic. Despite the gap, the DCF still covered the first quarter cash distribution by 1.16X.
While it appears that forecast 2011 distributable cash will barely cover 2011 proposed distributions, management still stated that they expect the distribution to be raised not later than the third quarter of this year.
Their view was based upon their view that several large projects will be spinning off cash late in 2011 and into the out years. These include the $2 billion 70/30 JV with Regency Energy Partners (RGNC) for the acquisition of Louis Dryfus midstream assets and the construction of a NGL fractionation facility (Lone Star NGL), a 50/50 joint venture with Enterprise Products Parnters (EPD) to run a pipeline from Cushing, Oklahoma to the Gulf Coast, and a host of independent and JV projects in the Eagle Ford shale formation.
Indeed, ETP has or is planning to invest in numerous nat gas and NGL joint ventures with several other significant pipeline companies: notably Kinder Morgan (KMP), Copano Energy, LLC (CPNO), and the aforementioned Enterprise Products Partners and Regency.
ETP has an ambitious slate of independent and JV pipeline transportation and storage projects.
In addition, other recently-completed pipeline projects, such as the Tiger Pipeline and Fayetteville Express, will become accretive to cash this year.
Fundamentally, I believe ETP is fine. Despite the spate of capital work, the Long-Term Debt-to-Capital ratio is comparable to other MLPs. The 1.3 current ratio is better than most of industry peers. Fitch recently affirmed ETP's credit rating is stable: maintaining their BBB investment-grade mark. This confirmation was concurrent with the successful placement of $1.5 billion in notes to help finance the company's new ventures and capital requirements.
Despite no 2011 increase in the cash distribution (yet), the yield appears secure. The recent drop in unit price widens Energy Transfer Partners' cash yield to over 7 percent. This is amongst the highest in the industry.
Chatter about changes to MLP tax structure
The scoop: Talk in Washington about revising the tax code included rumors that some of the tax advantages of MLP investments would be scuttled. Various MLP tax deductions and allowances would create a redux of the Canadian "Halloween Massacre" (October 31, 2006) whereas an abrupt change to MLP tax laws saw investors take a one-quarter to one-third haircut on their MLP units over a short period of time.
Analysis: Credit Suisse reported, "Proposal to Tax Pass Through Entities: The National Association of Publicly Traded Partnerships has informed its members that the Obama Administration is working on a proposal to tax pass-through entities. We checked with our DC Policy Group and they said this is not new and it is too late for any proposal to gain traction in the near term."
For those who have invested in MLPs for awhile, the Credit Suisse release rings true. This is not the first time the MLP tax structure has been challenged. The current Administration has a demonstrated track record of trying to hammer business and investment. However, the Democrats no longer control the Legislative branch.
My opinion is that a MLP tax overhaul just won't happen.
Talk of competing pipeline by Enbridge
The scoop: Enbridge (ENB) exec Pat Daniel reported that the company was considering construction of a new pipeline that would compete directly with the Energy Transfer Partners and Enterprise Products Partners plan to contribute assets and construction capital to commission a pipeline from Cushing, Oklahoma to the U. S. Gulf coast. Mr. Daniel noted that Enbridge would be the third major carrier to propose such a Cushing-to-Gulf Coast pipeline. TransCanada Corporation (TRP) has also made a similar announcement.
For background, ETP and EPD recently announced their joint venture to de-bottleneck the Cushing to Gulf Coast corridor. Cushing is a major crude oil storage hub. The purpose of their JV is to help relieve a glut of oil coming from Canada that is currently staged at Cushing. Unable to clear due to insufficient pipeline capacity out, the oil sells for a discount to other crude oil supplying Gulf Coast refineries from offshore or international sources. A major chunk of the U. S. refining capacity is located on the Gulf Coast, largely Texas and Louisiana. Hence, ETP and EPD released their intent to serve the producer/refiner market.
Analysis: There is enough oil bottled up at Cushing to provide a viable project for at least two pipelines. Enbridge is posturing for a piece of the action. This is a typical oil pipeline ploy. Rarely do regulated pipelines overbuild head-to-head from Point A to Point B. The question, assuming there is not enough business for three pipelines, is who will blink first.
I do not believe it will be the ETP/EPD combo.
It's notable that the Energy Transfer/Enterprise JV partners are contributing significant assets as well as cash. An old rule-of-pipelines is that it's difficult for a new pipeline to compete with "steel in the ground." Right-of-way acquisition, environmental regulations/requirements, and general resistance from property owners and communities drive up the cost of new construction. This is where the ETP/EPD combo has an edge: ETP is contributing an existing pipeline sufficient to move oil through 40 percent of the proposed corridor.
Furthermore, the consensus is that at least TWO pipelines are necessary to clear oil from Cushing. The ETP joint venture only needs to avoid "finishing last" to succeed. JV partners ETP and EPD are dominant players in Texas. It's their backyard.
Additional reference point: it's been reported that TransCanada will have significant environmental hurdles to successfully permit their proposed pipeline route.
Downgrades from several brokerage houses
The scoop: Morgan Keegan became the most recent of several brokerage houses to kick sand in ETP's face.
Analysis: The downgrade went from "Outperform" to "Market Perform." With the exception of Columbine Capital Services, all ETP downgrades I sourced were downgrades to "Market Perform," not "Underperform" or "Sell."
Price target revisions remained in the mid-50 dollar range.
While I respect analyst reports, I'm more interested in the long-term thesis. The analysts did not pan ETP units. They simply changed their short-term views.
It should be noted that some brokerages, like Credit Suisse, remained decidedly bullish.
The scoop: On May 4, ETP went "ex-distribution." Therefore, the unit price took an 89-cent hit.
Analysis: Meaningless. Unfortunately, the ex-distribution timing just happened to coincide with the jumble of other negative factors, magnifying the drop.
March unit offering
The scoop: At the end of March, ETP offered units at $50.52. The offer was Over-Allocated. The number of new units issued diluted the existing units outstanding by about seven percent.
Analysis: ETP periodically offers new units to raise capital in lieu of debt. This is typical of most MLPs. It is acceptable and often affords a good entry point for new investors or to add to the position as long as the investor remains confident that the management is investing the proceeds into good projects that will generate cash for future distributions.
Weak Technical Chart
The scoop: ETP has shown poor chart action. The unit price dropped through a $50.20 support level and the 200-day moving average.
Analysis: While I tend to rely on the fundamentals, I do pay attention to the charts. Indeed, I don't like the fact that the price cracked the 200-day MA. However, the move was on relatively light volume. It's worth watching closely to see if the move down is confirmed over the next few days.
Meanwhile the Slow Stochastic and MACD studies show Oversold and Weakness, respectively. The RSI (Relative Strength Index) and Money Flow Indicator have rolled over and are nearly in Oversold territory. As a long-term investor, I see this as more of an opportunity than a threat.
I will continue to watch the charts, but with a view for a finding a near-term bottom versus worrying that the unit price will roll off the table. I don't subscribe that we will repeat 2008.
Separately, I expect ETP will experience considerable yield support with the units below $50 each.
I don't believe Energy Transfer Partners is broken. It's hit a rough patch due to an unusually concentrated combination of issues/fears that have knocked the shares back for the short-term.
It's an opportunity to enter or a chance to build on an existing position.