There are termination provision, but assuming WMB shareholders vote for the agreement and WMB did not materially fail to disclose adverse information to ETE, termination is difficult. The provision below which governs Material Adverse Effect is the key provision. Essentially what the provision says is that if the economy, industry pricing, interest rates, regulation or force majure events have a disproportionate effect on WMB when compared to others in the pipeline business a Material Adverse Effect, which would be the basis for ETE to terminate, may have occurred. I say may have occurred because this is a fact based question which would most likely be decided in Delaware Chancery Court. At this point, the only possible event that might give rise to a MAE would be a CHK bankruptcy filing. However, even that may not give rise to a MAE, if the trustee in Bankruptcy continues to operate CHK as normal utilizing WMB services.
The other way to terminate would be a negotiated settlement. However, WMB would likely demand a very significant termination fee to go that route. ETE would have to pay that fee and would walk away empty handed.
"; provided,however, that the changes, effects, events, occurrences, circumstances, developments or states of facts set forth in the foregoing clauses (i), (ii), (iii), (v), (vi) and (vii) shall be taken into account in determining whether a “Company Material Adverse Effect” has occurred to the extent such changes, effects, events, occurrences, circumstances, developments or states of facts have a disproportionate effect on the Company and its Subsidiaries, taken as a whole, when compared to other participants in the industries in which the Company and its Subsidiaries operate."
In view of skepticism over the Williams deal and the general malaise in all things energy related, timing on the change is to say the least poor. It is not unusual for a CFO to leave after M&A with another entity. With overlapping positions, the market expects some degree of consolidation. However, most companies wait until the M&A is concluded before making these changes. If the handwriting was on the wall for the CFO, ETP should have offered incentives to him to stay the course until after the deal concluded.
Agreed. There is a substantial disconnect between actual production numbers and ETP share price. U.S. shale production of oil is down about 5% from its high. NG increases every year and sets a new high every year. ETP share price is down over 50% on these fundamentals. I realize the market is predictive, but even if U.S. production falls below 9mm bpd, you are only looking at a 10 % reduction of U.S. oil. NG will continue to rise. ETP is paid for transporting these products, yet its share price reflects losses similar to the production side. It may take time, but fundamentals are ultimately reflected in the share price. ETP pays a substantial distribution while you wait.
The Saudi, Russian, African and South American producers are all feeling the pain. The Saudi's cannot support their lavish social programs on $30 oil. The Russian's cannot support their military adventurism in the Ukraine and Syria on $30 oil. The African's and South American's are looking at insolvencies at $30 oil. So who cracks first ETP or these parties? I am betting the others cack before ETP at which time the share price will reflect the true ETP story.
If the BOD removed Marrone, the stock would double in a month. Unfortunately, I do not see that happening.
I listened to KMI' s call. They took an impairment charge and had some charges related to coal BK's. However, their core business results were fine. Richard Kinder who is KMI's largest shareholder did a good summary of the market which I captioned below. The results bode well for Etp, which has no co2 exposure unlike KMI, and appears subject to the same "sky is falling market".
"I think as far as the overall market is concerned, I said in the opening remarks it seems like a Chicken Little the sky is falling market, there seems to be no discrimination among based on quality or based on virtually anything. It is just, if oil prices go that, sell everything in the energy sector. And I think that's a very wrong-headed, short term view, but the market is what the market is. Obviously we believe we are tremendously underpriced.
If you look here's a Company that is going to have close to $5 billion of free cash flow in the total market cap, but this level is $27 billion, $28 billion I'm afraid to even compute, it upsets me so much."
I agree that Saudi's miscalculated the impact of their production on ppb. Most of OPEC is ready for a cut, but the Saudi's need to strike a deal with Mr. Putin. They have apparently met a time or two, but no agreement yet. The ruble is devaluing faster then the price of oil is falling so perhaps the Russians will come to the table. As you point out, getting all parties to agree to cuts, honestly, is a difficult task. You have a rogues gallery of players in OPEC, and, of course, Russia is not exactly known for keeping its word.
Practically, ETP is connected to oil if clients start to default on payments, declare BK. etc. However, many of ETP's clients are NG clients, and the price of NG has not fallen anywhere near ppb of oil. So there is some irrationality in the market. Psychologically, ETP is tied to the oil market which explains some of the irrationality. At this point we have a sell anything oil related mentality combined with some forced liquidations of positions and increased short interest in energy related stocks. Combine all of the above and you get a pretty dramatic sell off.
However, as you point out in your post, ETP still owns an array of assets and this has not changed from when ETP was priced in the 60's to today. Price erosion will continue until you get a bid under the price of oil. At that time you could get a pretty dramatic reversal, especially if ETP presents a coherent 2016 plan during its upcoming earnings call. The Saudi's, Russian's, etc. are all feeling max pain. We will see how long they can sustain their oil centric economies at ppb in the $20's.
Unfortunately for ETE they cannot pay the break-up fee and walk if Williams wishes to go forward and complies with all closing conditions. At that point, if ETE will not close, Williams can go to Delaware and sue for injunctive relief and specific performance of the agreement.
Both parties agreed to Delaware Chancery as the applicable jurisdiction for this agreement. They also agreed to injunctive relief and specific performance of the agreement. If one party attempts to walk, Delaware Chancery will take this matter on an expedited basis in view of the potential for irreparable harm to Williams if ETE is allowed to walk. My guess is six months from filing to decision if litigation is commenced.
Google the Dow/Rohm and Haas merger to see what might occur if ETE tries to walk. Very similar situation. Dow courted Rohm and Haas for sometime. After RH finally agreed to an acquisition, the bottom fell out of the economy in 2007 and 2008 and Dow tried to walk citing the MAE. Long story short, Delaware expedited the case and the matter settled on the court house steps. Dow ultimately agreed to buy RH on the original terms agreed upon. There is no easy or sure way out of this agreement for ETE.
Williams announcement was the proverbial "shot across the bow" aimed at ETE. Specifically, Williams' reading of the agreement is that ETE cannot walk from the deal due to the downgrade. If you read the agreement between ETE and Williams, specifically the definition of Company Material Adverse Effect, change in stock price, trading volume or credit rating of the Company is not a Company Material Adverse Effect. However, the facts or causes underlying or contributing a change may be considered in determining a MAE. Therefore, ETE's attempt to walk from the deal due to a credit downgrade may be a breach of this agreement. The provision in the brackets looks like a lawyer's dream as it qualifies what constitutes a MAE exclusion. Suffice to say, any attempt by ETE to walk will be met with litigation, and the ( ) provision makes the outcome uncertain for both parties.
"(iv) any change in the stock price, trading volume or credit rating of the Company or any of its Subsidiaries or any failure, in and of itself, to meet internal or published projections, forecasts or estimates in respect of revenues, earnings, cash flow or other financial or operating metrics for any period (provided, however, that the facts or causes underlying or contributing to such change or failure may be considered in determining whether a Company Material Adverse Effect has occurred unless otherwise excluded pursuant to any of the other clauses of this definition)."
Sandridge was delisted today by the NYSE. While the company is not technically bankrupt, it appears headed in that direction. I do not know if ETP did significant business with Sandridge, but I suspect it will not be the last U.S. small to mid cap fracker that will go by the wayside this year. It will be interesting to see how contract renewals shake out among the MLP's under this scenario.
In addition to NG there is still a lot of oil flowing through pipelines. As the quote from the WSJ indicates, production has been strong despite lower pricing. The U.S. was producing around 9.6mm bpd at peak production. No question the Saudi's are waging economic war on the rest of the oil producing countries, but they are also feeling the pain. They underestimated U.S. production efficiencies, and their plan to cripple U.S. production has hit a snag.
Unlike the U.S., the Saudi's economy is still predominantly an oil and gas based economy. Prices at $40 ppb hurts the Saudi economy a lot more than the U.S. economy. When the Saudi's finally dial back production, they will be facing a U.S. energy infrastructure that is a lot more efficient than when the Saudi's hatched this plan. They will also have used a lot of their capital reserves to support lavish social benefits in Saudi Arabia. Capitalism is marvelously self-correcting. Since the Saudi's are not capitalists, they failed to understand this phenomena.
"The unexpected increase was due to higher imports and an uptick in production. The EIA reported that U.S. crude production rose by 23,000 barrels a day last week to 9.2 million barrels a day. While U.S. output is down from a peak in April, production has fallen more slowly in response to low prices than many investors initially expected. Companies have been able to cut costs and increase efficiency, keeping output high in a low-price environment."
Good points. Long term I am bullish on ETP. They are one of the better run MLP's. On top of all the bad news on the oil side, we have an extremely warm winter so far which is not helping NG prices in the near term. 2015 was the perfect storm for this sector, but it will pass. The MLP's are in much better shape than produces and services who took on large debt during the boom and now are facing the grim reaper.
I indicated that not everyone will follow KMI's path. However, all MLP's have the same issues in an environment where equity raises are extremely dilutive and borrowing money will be more expensive and more difficult. If you review ETP's financial statements for the first 3Q's of 2015, ETP paid $2.2 BB in distributions and had capital expenditures of $6.5BB. To meet these obligations ETP issued $2.3BB of stock, increased long term debt by $3.1BB, had net cash from operations of $2BB. They also sold some assets to round out their cash raise. So if equity raises declined and debt is more costly and/or less available, ETP, like all MLP's, will need to make some decisions.
In a loose money environment in which loans and parties interested in ETP equity raises, were plentiful, ETP and other MLP's could have it all: ever increasing dividends and large capital expenditures financed by other people's money. At some point, in the very near future, all MLP's will need to achieve a balance between growth and distribution, because the days of easy money are over. ETP is a well run company with good growth prospects, but the era of using other folks money to fund growth while you are paying a yield of 14% to shareholders will need to be reevaluated.
There are a few scenario's that come to mind:
1. ETP believes issuing further equity to fund growth is too dilutive to unit holders under a reduced pps scenario.
2. ETP believes credit market terms are cost prohibitive for future credit needs.
3. ETP eyes a new acquisition that it believes is prudent but would require cash not otherwise available through 1 or 2 above.
4. A prolonged slump in both oil and NG that significantly reduces U.S. oil and NG production and in the process reduces ETP's client base.
5. Threat of a downgrade of ETP's credit rating below investment grade. This is what started KMI's precipitous fall this month after Moody's placed KMI on watch.
6. A strategic decision by management that a yield of say 6.5% (50% of current) while retaining an additional $1BB annually is a good balance between yield and growth.
MLP's are required by their limited partnership agreements to distribute a certain % of operating cash flow. However, unlike REITs which are statutorily required to distribute at least 90% of ordinary income to avoid taxation at the corporate level, MLP's are not required to meet this % to maintain their tax status. Therefore, MLP can amend their Ltd. partnership agreements to reduce % distribution. In fact several have in the past year including LINE, VNR, BBEP, EVEP, NRP and BWP. If ETP decides to cut their distribution, the 90% rule is not an impediment to this move.
Management has not said anything. All the MLP's are going through the same exercise KMI went through last week. Can their cash flows support the distribution, all expenses and all capital expenditures without resorting to the debt or equity markets. Kinder decided there would be too much dilution under current share price, and the debt market would charge close to usurious rates to lend to them. Therefore they decided to self fund all capital expenditures, expense and dividend (albeit at a 75% reduction of dividend). From the date of the initial announcement of this as a consideration to the date of the final decision it was approximately one week.
I suspect if any MLP's are going to follow KMI, they will do so before year end. Although KMI is now a C corp, the business model and business issues are the same as MLP's.
This is not to say everyone will follow KMI. However, everyone will need to answer the same issues: can we fund our distribution, maintain our existing pipelines, storage facilities, etc. and still fund our growth with minimal access to the debt and equity markets. After the OPEC meeting, it is pretty clear energy prices will remain subdued through most of 2016, barring an unforeseen significant disruption of production. With that variable off the table, and 2016 budgets in the can, I suspect most MLP's will make this decision before year end.
As my prior post mentioned, many existing clients are producing full out because they have no choice to meet interest and principle payments. These clients might ultimately go BK, but larger more solvent companies will buy their assets on the cheap, and they will still need to move the oil and NG. If you are a short term investor, the transition, as noted in recent price action is painful. However, if you are a longer term investor, the question you need to ask is whether the American energy renaissance is over? If you believe it is, then you should get out.
I tend to think it is still intact. OPEC may be doing its damnedest to slow U.S. production, but in the process, they are killing their own members. Just look at the elections in Venezuela last night. Several OPEC members are looking at political upheaval unless they can sell oil at more than $40ppb. With upheaval comes reduced production. U.S. shale producers have near term problems no question, but countries like Nigeria, Angola, Venezuela, Iraq, Libya, etc. have much bigger issues. My guess is U.S. shale outlast production decreases in many OPEC and none OPEC members. One more item. Shale has grown with the most anti-carbon President in U.S. history in office. This might change by 2017.
Interesting article. The WSJ also had an interesting piece on why U.S. production may not fall as much as anticipated. As the quote below indicates, there still may be a lot of oil flowing through U.S. pipelines in 2016. Small producers with large debt have no choice but to continue production. Long term oil prices at $40 are not good for the energy complex, but pricing MLP's below B.V. does not recognize the continued need to transport U.S. crude and NG which is not going away anytime soon.
"Also likely to slow the decline of U.S. oil production: more than 1,200 wells that companies drilled but left untapped in the hopes of higher prices.
Small or financially strapped producers, which must keep drilling to get the cash to pay interest on billions of dollars of debt, will probably begin tapping those wells soon, according to Rystad Energy, the Norwegian energy consultancy. It forecasts that these wells could help push up U.S. production in 2016 by about 200,000 barrels a day from the 2015 average.
These wells “will be one of the main drivers for 2016 shale production,” said Bielenis Villanueva-Triana, a senior analyst at Rystad."
This past week we have reached the point of indiscriminant selling that is unrelated to the fundamentals of ETP:
1. ETP is selling at 50% of its yearly high which is a bigger fall than the price of oil or NG over the same time frame. Even though ETP has indirect but not direct exposure to the price of oil or NG under its toll road model.
2. The premise that Yellen's interest rate hikes over the next year will impact both borrowing costs and attractiveness of yield asset alternatives to ETP is misguided. Yellen likely will do .25% increases over the next year which would lead to a 1% figure a year from now. This assumes no economic downturns or other shock to the economy that would halt these increases. Folks looking for a quarterly yield above 5% will not flock to T-bills paying 1.5%. Similarly, lenders will not be able to increase borrowing rates substantially under this scenario.
3. The notion that lenders will turn the lending spigot off to well run MLP's with robust cash flows is unlikely. Most of these lenders have loans all over the oil patch to producers, servicers, mid streams etc. If oil stays at around $40 bbp and NG at around $2, lenders biggest concerns will be the producers and their servicers who will have real problems not only meeting principle payments but interest payments. ETP does not have this issue, and can clearly service their debt. There is no incentive for banks not to work with good customers like ETP who clearly have the werewithal to service their debt.
4. The current yield is over 11%. Even in the unlikely case of a 50% distribution cut, you are looking at a yield of 5.5% which still places ETP in the top 5% of large cap company yields.