"It’s clearly a disappointing deal” for investors, says Jay Hatfield, portfolio manager of the InfraCap MLP exchange-traded fund, of Energy Transfer Equity's (ETE, ETP) takeover of Williams Cos. (WMB, WPZ), but bad timing and evidence of panic selling among MLPs exacerbated today's selloff.
But Hatfield is not against the deal or the MLP space, seeing eventual upside for ETE but perhaps not be until 2016, when deal closes and energy prices have stabilized; "It is a great idea for 2016, but there may be better opportunities before then," Hatfield says.
One reason for the extreme nature of today's selloff could be that there is little liquidity and few buyers in the energy market right now, and particularly the midstream energy market where ETE and WMB operate, says Tudor Pickering's Brandon Blossman.
ETE shareholders also may be concerned the company is converting to a corporate structure as part of the deal, which plays into growing talk that the MLP business model may not survive the current difficulties.
"We now believe the financial operating structure of the MLP may not survive in its current form, even as we say that most businesses using the MLP model are good ones,” writes Brian Nelson, president of Valuentum Securities; he thinks the stock market eventually will demand that MLPs pay their distributions and dividends out of earnings and traditional free cash flow, causing the declines in their unit prices to continue.
As Rich Kinder abandons the MLP structure he helped popularize, CNBC's Jim Cramer feels confident that rivals are taking notice, thus investors should expect many more deals in the energy MLP space.
Cramer tabs three MLPs he thinks could end up in play: Enterprise Products Partners (NYSE:EPD), the entity that received gained permission to export condensate in "a huge game-changer"; Energy Transfer Equity (NYSE:ETE), whose cash flows should "explode higher" and its payout increase dramatically once temporarily relinquished incentive distribution rights are reinstated, which should happen next year; and Atlas Energy (NYSE:ATLS), a relatively cheap stock which should be able to raise its distribution dramatically for the next few years.
BofA/Merrill Lynch also thinks the deal may be a harbinger of what’s to come for other MLPs that grow too big: "While we do not see other GP-buying-LP transactions occurring yet, we also think it provides a template for a somewhat graceful exit from a structure that can prove long-term unwieldy as an MLP grows... [We] expect significant interest in potential MLP consolidation candidates."