It has been a miserable couple of months for unitholders of Energy Transfer Equity (NYSE:ETE) (NYSE:ETP). The midstream giant has declined over 85% since the August 2015 as the outlook for oil and natural gas prices deteriorated, dragging along for the ride merger partner Williams (NYSE:WMB).
However, things went from bad to worse on Monday after news broke of CFO Jamie Welch leaving the company, being replaced by ETP CFO Thomas Long. This very concerning news sent Energy Transfer Equity down a massive 40%.
Why did the CFO leave? We don't know
The timing of Mr. Welch's departure could not be worse for Energy Transfer Equity. There were already serious concerns about how exactly the company was going to secure financing for their pending merger with Williams as the capital markets have soured greatly on anything having to do with energy.
Energy Transfer Equity in its SEC filing mentioned that they were in talks with Mr. Welch to stay onboard on a consulting role for its LNG export project as well as other financing matters. Furthermore, the company stressed that the replacement of the CFO was not based on "any disagreement with respect to any accounting or financial matter involving the Partnership or any of its affiliates."
What is worrying the markets is the total lack of details. Typically, top company executives like a CFO do not leave mid-process. Was Mr. Welch fired or did he quit? Was there trouble in securing financing for the merger? What does this news mean for the Williams merger? Unfortunately, these are all questions that lack sufficient answers.
However, taking this news at face value, we investors can come to some broad general conclusions.
Energy Transfer Equity merger with Williams is likely not getting done
There were already growing doubts that Energy Transfer Equity was going to be able to close the Williams deal. Both stocks have been stuck in a death spiral with no end in sight.
Many have speculated that the terms of the deal would need to be revised to an all-equity transaction. Energy Transfer Equity is currently offering Williams' shareholders $8.00 in cash and 1.5274 shares of "ETE-C".
The cash component represents ~$6.05 billion, well above Energy Transfer Equity's current market cap. It is highly doubtful the company can raise this amount of cash in this environment. While they do have a bridge loan lined up for this amount, they will eventually need to come up with a long-term financing solution. Given the market for midstream debt, this will be a hard sell even for an experienced CFO.
However, Williams shareholders are unlikely to budge on the cash amount. After all, it was Energy Transfer Equity that forced it to end its proposed buyout of MLP Williams Partners (NYSE:WPZ) after it made its unsolicited bid for the company. Williams only agreed to merge with Energy Transfer Equity after a long and bitter battle that was the auction process and relented only when the later sweetened the deal to include the cash component.
With the wide gulf between the two sides, the markets are betting that this deal will not be competed. The merger premium is hovering ~30%. Though, ending the deal will be costly due to breakup fees and expenses incurred. For its part, Williams recently reaffirmed that it was unanimously committed to the merger, though this is likely a tactic for it to avoid a similarly large breakup fee.
CFO got fired as a scapegoat for the failed Williams deal
This is obviously my opinion but I think it reflects some of the sentiment I am reading. While Energy Transfer Equity CEO Kelcy Warren was the driving force behind the scenes for the Williams merger, Mr. Welch was the public face. As a result, he may become the scapegoat if the merger were to fail.
Even if Energy Transfer Equity were to find enough cash to fund the transaction, Williams has likely become a less attractive asset. This is especially the case with rumors swirling about Chesapeake Energy (NYSE:CHK) one of Williams' largest clients, nearing insolvency.
Energy Transfer Equity has fallen to an insane valuation level --$4.10 per unit and a 28% yield. I do not know what the market is thinking. This company is not close to bankruptcy or even frankly a major distribution cut. Energy Transfer Partners remains a cash cow. There is something very wrong here.
On the other side of the coin, as a Williams shareholder, the drama resulting from the Energy Transfer Equity adventure has been disastrous. While the CHK news is concerning, Williams fundamentals are not that bad. Some would even say they are strong. Nevertheless, we have found ourselves along for the roller coaster ride none of us really wanted.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am/we are long WMB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.