ETE/ETP have their own debt challenges. I would bet Warren cuts the dist at ETE to prop up ETP, while he has his distributions covered with the conv/pref plan. The end of this merger was good for both sides.
: Moody's changes Energy Transfer Partners' outlook to negative
Global Credit Research - 29 Jun 2016
Approximately $25.4 billion rated debt affected
New York, June 29, 2016 -- Moody's Investors Service (Moody's) changed Energy Transfer Partners, L.P.'s (ETP) and Energy Transfer Equity, L.P.'s (ETE) outlooks to negative from stable. Moody's affirmed ETP's Baa3 senior unsecured rating and affirmed ETE's Ba2 Corporate Family rating (CFR), its Ba2 senior secured debt rating and its SGL-3 liquidity rating. The ratings and stable outlooks at Sunoco Logistics Partners Operations L.P. (SXL-backed, Baa3), Sunoco LP (SUN, Ba2), Florida Gas Transmission Company LLC (Baa2) and Panhandle Eastern Pipe Line Company LP (Baa3) were not affected by these actions.
The negative outlooks at ETP and ETE reflect the more challenging energy market which confronts their midstream energy operations, which has resulted in higher debt leverage at both entities, as well as ETP's weaker distribution coverage, and the potential litigation fallout emanating from ETE's recently terminated bid to acquirThe Williams Companies, Inc. (WMB, Ba1 review downgrade).
There's no way the board will entertain another bid at the moment. It would take someone like PSX or EPD making a rich hostile bid, don't see either one of those doing it. The list of potential acquirers is small. Don't think WMB can merge WPZ anytime soon either. So it's sell a few assets, cut the div, repair the balance sheet and plan for the growth that should be there for the next several years as the nat gas fundamentals play out and oil drilling increases.
From a Street article, most of their's are useless but Tudor Pickering knows the sector, ETE has a debt, growth issue also. WMB imo is a great buy now if you have a three year outlook. WPZ's coverage as they say was 1x. The div announcement was more for the merger negotiation than a good long term plan. I don't have a problem lowering the div to fund the WPZ growth and repair the balance sheet. WMB is a bargain.
Analysts at Tudor, Pickering, Holt & Co. said Wednesday that the focus now should be on each entity on a standalone basis, with ETE needing to address distribution coverage and leverage issues at its limited partnership Energy Transfer Partners LP and Williams needing to update analysts on growth capital forecasts, cost-cutting efforts and its own distribution policies and those of its master limited partnership Williams Partners (WPZ) .
The analysts said yesterday that Williams screens "cheap" among its large-cap peers and is one of the least expensive companies in the industry. "While some payout revision is likely at WMB and possibly WPZ as well, cur
rent ~1x distribution coverage means that a large reduction is not a foregone conclusion," they said.
I agree completely. We need some guidance, agree that the div cut will be a good thing. I would expect a modest dip and recover to a new level after the guidance and cut. I don't things are nearly as bad as some imagine. WMB's issue is they have growth and they cost of equity is too high currently and the balance sheet is maxed out. Too much growth is a much better situation than no growth or a declining sector and too much debt. Believe somewhere in this mess, there were exploring the sale of Canada, a good business but not good synergy with rest of assets. ETE has the same problem, how do you grow ETP when the cost of equity is 10% plus. Do think part of the problem will be solved as comm prices come back and yields for MLPs drop as people realize the cash flows are still intact, WMB has 90% fee based rev, CHK should do a lot better next year at $3.50 gas, the bk risk is almost gone. The 10 yr T note at 1.4% vs an MLP with a 10% yield, that's a disconnect. You get WPZ back to maybe 5% growth and the current dist of $3.40 should be priced at 5% yield, that's a $68 unit price and WMB owns 60%. This is going to take a couple of years but a patient investor will be rewarded imo. And you have to have a bullish position for nat gas, I do.
pj, this has been a mess, was in favor of the deal initially because of the assets but gradually decided that I didn't want to partner with Warren, still don't. Just looked at the nat gas futures, every month is at or above $3, a little different from the poss of dropping into the $1s a few months ago. Everyone agrees the fundamentals for gas are great, they could be wrong but does seem to be the trend. Now we need a change in the WMB board and some guidance. IDRs in MLP at a certain size don't work anymore, Warren will see that soon, if not already. I've owned ETP and ETE too long to sell it, the tax bite would be big but won't be buying anymore. He won't be able to grow ETP with the cost of equity at 10% plus. All of this will be resolved with $70 oil and $3.50 gas next year. Volumes will be increasing again. If WMB falls materially into the teens, I may buy some more, will see.
Thanks for your comments on the board, kink of hard wading through the noise. I was somewhat surprised at the 80% pos vote. More and more, I am amazed at the short term, trader mentality of "investors", seems everyone wants to be George Soros and trying to make global macro bets. Still don't understand the brexit decision, seems it is similar to what is going on in this country and the rise of Trump and Sanders. Oh well, don't want the
"investors" on the board to get into that area. I wonder what WMB's next move will be, I suspect they were looking at some assets sales, maybe Canada. Doesn't seem that WPZ can be done until WMB currency improves but that needs to be done for the cost of capital. At least nat gas seems to be improving.
wiz, what's your call on the appeal. I am still baffled by a Board that would want to support a merger than couldn't handle the add'l debt. That's not taking care of your current holder, although as you said, the institutions could care less about the long term or the tax hit. I've got a very low single digit basis. I have heard that the board was weak and dysfunctional, the backgrounds don't look that strong to me. WMB needs a new Chairman and the aciivists should be booted also. Williams imo is still the best situated infrastructure co in the sector.
Williams is worth $30 per share and will probably exceed ETE's performance over the next few years. And ETE has a debt problem with ETP. Will probably reduce their dist. You are clueless.
Williams shareholders overwhelmingly voted in favor of a merger with Energy Transfer Equity on Monday morning according to a preliminary tally company Chairman Frank MacInnis presented at a special meeting.
Approximately 79 percent of the some 750 million outstanding shares eligible for a vote were represented Monday. Ballots for 80 percent of those shares represented voted in favor of the deal under which the Tulsa-based Williams would combine with Kelcy Warren's ETE.
Probably the fear of a roll up of WPZ into WMB. Don't see how it works as long as WMB currency is depressed. Could merge WMB into WPZ? They need to rid themselves of the IDRs.
You could be right, I don't think the payment to WPZ was very damaging, WMB owns 60% of WPZ and WMB wants to support WPZ so really not much lost. As someone mentioned nat gas price doesn't really help cash flow, but the nat gas price increase will spur more drilling, it's about volumes and e an p s need a decent price to drill. Does seem WMB will sue ETE after the deal is killed tomorrow and I really don't have a good feel for that, could take a while and any damages could be immaterial. Seems to me the WMB board was bent on the merger even though imo wasn't good for current WMB holders, never understood that, the board needs new members. I suspect the activists had more influence on the rest of the board than they should have. And the chairman seems weak. I would bring back Steve Malcolm, the CEO during the Enron crisis, did a good job of rebuilding the co, would make a good chairman. If WMB doesn't rise, then it's going to be an easy target for someone else, assets too cheap. EPD could do a one for one, their dist is $1.60ish, selling in $27 range, that would be a great match, NGLs and gas pipe, plus the NE assets and NW and the petro chem business. EPD has a great mgt, the GP, the Duncan family owns 30% of the partnership, no IDRs, their interests are alligned with other owner, unlike Warren.
Imo, ETE didn't breach the merger agreement, so stretch for damages. This deal is dead, even all equity, Warren doesn't want it, he has his own challenge of funding ETP's growh, double digit yield now. He doesn't want to compound with a worse balance sheet.
Pj, I'm relieved that this looks to be over. Will take some time to get back on course, need guidance, new div?, and definitely a new board. If it stays at this price level, someone else will step up, the assets are too strategic, EPD, D, PSX...
That is surprising. I'm just glad this saga is over. The board needs to be replaced. They need a strong chairman and to get rid of the activist investors. Will be interesting to watch as Warren cuts the ETE dist. I own too much but might buy some more. The div cut will inevitable cause a short term dip, I think, who knows. In May of 15, they were projecting $6 billion of ebitda next year. Almost 90% of revs are fee based. We need a new board and a new strategy, the WPZ merger is probably back, makes sense.
Warren has already converted his distributions to preferred dividends with the convertible preferred plan, he will receive his for the next 9 quarters, even if the rest of the ETE owners get zip. So there is no risk to him with a cut. And gets to buy ETE units at $6 a couple of years out. What a partner.