ETP Wait until the secondary to buy...August 17, 2012 Energy Transfer Partners files $1B mixed securities shelf :theflyonthewall
Update on an Energy Holding
10/02/12 - 10:56 AM EDT
Energy Transfer Partners (ETP:NYSE) announced the successful preliminary results of the Sunoco shareholder vote related to the merger. We expect final approval and closure of the deal this month, whereby ETP will acquire Sunoco for $25 in cash and 0.5245 ETP shares for each Sunoco share. When the deal closes, the arb pressure will ease, and this should lift the shares, as this has been an overhang on the stock.
We have been very critical of ETP's management after it has made several acquisitions that have levered the company's balance sheet and depressed distribution growth. We were also disappointed that the company announced a secondary offering to help fund this deal -- something that management had indicated it wouldn't do. This is why it's been ranked a Three in our portfolio for several months.
That said, the stock has been a big underperformer, both relative to the market and its peers. Year to date, the stock has underperformed the master limited partnership group by 1,000 basis points, and it has lagged by 700 basis points since it posted its disappointing quarter. It also trades at a big discount to the group at 8.9x enterprise value to EBITDA, compared with the 13x industry average.
We are not arguing that the stock should trade at parity, but the massive underperformance, low expectations and strategic Sunoco deal offer upside -- in other words, not much has to go right, in our view. We have stayed patient with it because we believe the Sunoco deal is a positive acquisition strategically for the long term, as it further diversifies the company geographically, reduces its commodity risk and gives it a top-notch logistics business, which should lead to improved growth.
There is still speculation that the company will raise $300 million to $400 million (after the close of the Sunoco deal), and this will cap the upside in the short term in our view, but with a better balance sheet and new synergies from the deal, we believe that the downside is limited and that a stock price in the mid-$40s is achievable.