Ken Lee

Ken Lee
Contributor since: 2012
I think you've forgotten that this pipeline, like most fee based mid-stream projects, is underwritten by long term (10+ year) take or pay contracts from the pipeline's customers. Even if the pipeline's customers do not ship any barrels, they will be on the hook to pay the demand charges, usually 90% of the tariff, on the number of barrels (apparently 450k bpd) they have committed to ship on the pipeline.
As you point out, production in the Bakken is peaking in the near term and there is what seems to be ample take away capacity out of the basin. That said, much of this take away capacity is crude by rail, which has a much higher cost per barrel (low double digits to mid teens per barrel to the east and and gulf coast) than a pipeline, and which producers have much shorter commitments to. Given an end market when the pipeline is ready, the shipping decision which will produce the higher net-back for producers is not likely to be rail, but rather pipeline.
Though there is uncertainty after the term of the take or pay commitment on Bakken Express expires 10+ years from now, the near term would seem contractually certain, as long as there are not an abundance of producer bankruptcies in the Bakken.
Unlikely there is much of one. WMB there was already a 30% premium in the original offer. ETE is giving WMB holders some price certainty by paying 15% of the consideration in cash. The question is 15% of what: the value of the current offer price, the value of the original offer, or something in between. If WMB walks away, likely the stock goes down dramatically.The only thing keeping WMB from dropping like the rest of the space has been the original ETE offer, and ETE knows this
Given the $2.1B (750 million shares x $2.84/share) of cash available to pay WMB dividends in 2016 and the credit uplift from having a larger more diverse business, ETE should be able to raise the $5-7 Billion of debt needed to pay the cash portion of this transaction without paying materially more than the 5.5% it is paying on the $1 billion of 2027 notes it issued in May.
The cash component of the deal consideration (likely $5-10/share given the above math) will give WMB shareholders some price certainty in this volatile market, and provided the tax adjusted cost of the incremental debt necessary to fund the cash component is less than WMB's yield (2016E 6.7%) this will less dilutive than issuing more equity, in other words accretive to ETE, which will be good for WMB holders over the medium to long term.
According to Bloomberg, when ETE agreed to take part in WMB's auction, they did not agree to the the standstill provision(s) which WMB had asked for.
If this is true, even if the WMB board does not choose ETE, ETE can still take its original offer (or anothe offer) directly to WMB shareholders. Shareholders are likely to go for this offer as it values WMB at 14+% permium to its current closing price.
Who do you throw in the Big 5? KMI, EPD, ETE, and who?
Curious what multiple/valuation you think the coal royalty business might yield in a sale? Do you think this could be done in an accretive manner to ETP, or even RGP?
At the end of the day, Hedgeye is right. KMP and EPB are underspending on what they call Maintenance Capex, to the benefit of Distributable Cash Flow ("DCF") to unit and shareholders.
That said, it's hard to know if they are really underspending on true Maintenance Capex or if they are they are just capitalizing some of their maintenance costs and are accounting for those capitalized costs in their other Capex buckets. If they are truly underspending, this is bad because they are setting themselves for some future failure or major maintenance issue which could result in a major financial liability a la Endbridge or PG&E. If they are just capitalizing some of their maintenance costs, its to their unit and shareholders' benefit as DCF is that much higher and the company is able to "pay" for these costs over time.
Rich Kinder's buying KMI share on weakness would tend to indicate the latter is happening.
Perhaps all Capex should be excluded from DCF to get to an apples to apples comparison. After all, the benefit from Maintenance capex is not just felt in the current accounting period, but rather into the future.
Do you guys have a good place to pick up current propane and propylene pricing? Thanks!
As a funding vehicle, its inevitable that ETP issues more units to finance its growth. As with any big block trade, any downtick in unit price from a financing is likely to be temporary and work itself out in the medium term as long as ETP's operating metrics improve as expected.
I agree with your first point. Any improvement cash flows will be some what gradual as projects come online. In the interest of prudence/conservatism, I think management will try to keep something in their back pocket.
I also agree with you with regard to the "non-core divestitures." However, give the one time nature of a divestiture and the whole Energy Transfer family are levered a bit on the high side, and I expect management to use the proceeds from divestitures for debt reduction.
Hi- The IDR waiver for the Citrus acquisition ($220 million over 16 quarters or $13.75 million per quarter) took effect in Q2:2012 and the IDR waiver for the SUN acquisition ($210 million over 12 quarters or $17.5 million per quarter) took effect in Q3:2012. As such, they have an on going, but no incremental effect on ETP's IDRs to ETE. Will try to publish my model for ETP at some point, but I think the next step function for them will be the drop down of some (and eventually all) of ETE's stake in HoldCo. Though I don't expect the cash flows from operations to change dramatically, the big question will be HoldCo valuation and how much cash/ETP equity will want/take as consideration. Also to be considered will be how much of an IDR waiver ETE will give as part of the transaction.
sorry - that should read Q2:2013 or Q3:2013
I don't think that RGP common unit holders will go for a sale to ETP unless they are getting a valuation, in this case I'm thinking EV which includes the value of RGP's GP, which is close to that of ETP. I also don't think ETP will pay too much of a valuation premium for RGP due to their shared services agreement which should preclude a lot operational synergies. I think that RGP's GP will continue to be undervalued until, amongst other things, RGP's IDRs get into the 50% distribution tier. For this to happen RGP needs to increase its distributions. An increase in distributions will take organic, or cheap inorganic, growth.
My guess is that they might, but I wouldn't count on it in the short term. I think ETE's first order of business will be to simplify the ETP Holdco structure, either by: (1) gradually selling its interest in the entity to ETP, or (2) by gradually selling ETP Holdco's assets to either ETP or RGP. I'd like to see RGP pick the Sid Richardson Gathering and Processing assets as they seem like a good fit with RGP's G&P assets in the Permian Basin; and this added scale would also likely push RGP's IDR distributions into a higher tier, to ETE's benefit.
After simplifying ETP Holdco, I think ETE will try to collapse RGP into ETP. For this to happen, I think we may have to wait for two things: (1) RGP and ETP will have to be close in terms of relative valuation (ex EV/EBITDA and Distributable Cash Flow), and (2) RGP's GP and IDR distributions relative to their total distribution will need to be on the same order of magnitude as ETP's.
Once the above two simplifications (ETP Holdco and RGP) happen, ETE could look have ETP buy in ETE, and its IDRs in ETP and RGP.
PS. I think ETE/ETP will leave SXL outstanding as a funding vehicle for crude and refined product projects as long as its cost of capital remains as cheap as it is.
Unfortunately, as of last quarter, ETP's LTM Distribution Coverage Ratio (DCR) was 92.4%. In other words, over the last twelve months, they had to draw down ~$100 million on their credit to pay maintain their distributions at current rates. To get a 5% increase in distributions, ETP would seem to have to either increase its DCR by 12%+ to pay its distributions out of current cash flow, or it would have to draw down on their credit facility by $200 million.
I think you miss calculated the cash need for this transaction.
As of 3/31/12, SUN had a consolidated Cash and Cash Equivalents balance of $1.985B. Of this, $0.037B was from SXL. This would leave a "SUN only" Cash and Cash Equivalents balance of $1.948B which could be used to pay part of the $2.647B cash component of the deal. This would leave just $0.699B of the cash component of the deal to be financed either through a debt of equity issuance. This delta in the cash balance should get you another $50-75 million of cash flow depending on how the difference is financed.
Also, based on SUN's 3/31/12 share count of 105.9 million shares, ETP would only have to issue 55.5 million shares. This should save about $11 million of cash flow.
Based on the above, I think your annual cash flow is light by $61-86 million.