KMI is prudently managing its assets and liabilities in a difficult energy environment. While most MLP's continue to try to maintain their quarterly payments to shareholders, this path places these entities in peril. Banks are in the process of recognizing bad loans across the energy spectrum. Debt markets will only be available to MLP's at prohibitively expensive costs, if at all. The other alternative for these MLP's is to issue more units when unit prices are already depressed. This leads to large shareholder dilution.
KMI recognized this dilemma and bit the bullet on the dividend in order to be self funding and self sustainable without accessing the debt or equity markets. Their change to a C corp. also gives them more flexibility than the master limited partnership structure. They are prudent in walking away from low margin projects or projects which face the likelihood of regulatory disapproval. This may make for a rough road in the near term, but long term KMI's sustainability and profitability will exceed MLP's that continue down the path mentioned above.
It comes down to the provision below. Specifically, whether ETE used commercially reasonable efforts to secure the tax opinion from Latham which is referenced in 6.02(d). This opinion is a condition precedent to closing the merger. I suspect the issue of whether ETE used commercially reasonable efforts or obstructed the issuance of the Tax opinion will also end up before the court similar to the potential dilution issue.
(b) The Company, TopCo and Parent shall each use its commercially reasonable efforts to obtain the Tax opinions described in Sections 6.01(h), 6.02(d) and 6.03(d), including by making representations, warranties and covenants requested by counsel in order to render such Tax opinions. Each of the Company, TopCo and Parent shall use its commercially reasonable efforts not to knowingly take or cause to be taken any action that would cause to be untrue (or knowingly fail to take or cause not to be taken any action which inaction would cause to be untrue) any of the representations, warranties and covenants made to counsel in furtherance of such Tax opinions
I think ETE would pay the termination fee tomorrow if they could, but they can't. The termination section 7.01 of the ETE/WMB agreement lists events that allow for termination by either party. Absent the occurrence of one of those events, and in the event of ETE attempted termination, WMB could sue for specific performance of the agreement. To date, none of those events have occurred.
The last event, still outstanding, that could allow for termination is the failure to procure WMB shareholder approval. If WMB shareholders approve the deal, the deal closes or ETE gets sued if it tries to avoid the deal. I suspect Delaware Chancery, which is known for enforcing agreements as written, would mandate closure at the terms in the agreement.
Unfortunately, at this point, it appears only one party, ETE wants out of this deal. WMB has stated publically on several occasions they are committed to the deal. The contract is tight, and there has been no material adverse event that would allow ETE to walk. From WMB's perspective, they have a much better chance surviving the downturn in oil and NG as part of ETE than as a stand alone. ETE's last chance to exit the deal is the shareholder vote, but I suspect WMB shareholders will approve the deal. Perhaps in a few years when energy prices rise and stabilize, the deal will look better than it does today.
I listened to the call. Participants emphasized that ETE would do what is necessary to held ETP maintain its distribution through mid 2017 at which time ETP's growth will be substantially higher based on new projects coming on line. They also stated they see no events in 2016 that would necessitate a cut in ETP distributions. They were fairly non-committal on the growth of this distribution in 2016, but I can live with a $4.22 annual double digit distribution for all of 2016.
Buffet, Tepper, etc. are long term investors. They realize the MLP's price declines have been disproportionate to their underlying value. KMI addressed credit concerns by slashing its dividend. It has robust cash flow to service its debt. Yet its stock continue to trade like BK is on the near term horizon. This is true of many MLP's.
The Saudi's, Russians and OPEC can't live with $30 oil indefinitely. Talks this week are just the start. A freeze of production will not do the trick. At current levels the market still has 300mm more barrels than needed. Robust economic growth, or the lack thereof, will not consume this surplus. Eventually, OPEC and non OPEC countries will need to cut production 5% or more. The Saudi's original target, U.S. shale, has already cut production 5% and likely 10% by year's end. Therefore, they have accomplished their original goal. However, that is not enough in the current market to stabilize and ultimately raise prices.
Buffet and Tepper are betting over the long term prices will adjust as they always have over the decades. Hence the investments in KMI, ETP, etc.
Yes, the problem is waiting it out. The merger is targeted for completion the first half of 2016. ETE needs to hope the FTC studies the HSR second request material for a long time. The disproportionate effect language also becomes interesting if a lot of MLP's start making contract concessions. WMB could then argue any CHK concessions are not disproportionate to the rest of the industry, therefore, no MAE.
Either way, if ETE tries to bolt from the deal without reaching an amicable termination with WMB, 2016 will be dominated by litigation and ETE will have that outcome hanging over its head most of the year.
I don't see WMB shareholders walking away from this deal easily. If the deal was a straight share swap, then maybe. However, the deal will be a pro-rata cash and share deal, and the cash component likely looks pretty enticing to WMB shareholders at this juncture.
ETE is the port in the storm for WMB, and they likely do better under the ETE umbrella than as a stand alone entity. As alluded to above, perhaps a large termination fee to WMB might entice a dissolution of the agreement. However, ETE would need to consider the pros and cons of paying that fee and walking away without nothing to show for the payment. Very difficult choices for ETE.
CHK is indicative of a bigger problem for all the MLP's and C corp KMI. Trustee's in BK will be able to renegotiate contracts with MLP's. They will ask for concessions and likely get some. However, even producers not in BK, but trending that way, will seek concessions sooner rather than later. They are already doing so on with service companies. The pitch will be that granting concessions will keep us out of BK and all parties will avoid the uncertainties of BK.
How MLP's respond to these requests will depend on the prospects of the party requesting concessions. At this point, no one really knows the impairment or potential impairment of the multitude of U.S. producers. If you look at U.S. production numbers, producers have been remarkable resilient albeit at a much lower ppb. However, it looks like 2016 will be the moment of truth for several U.S. producers. Until we see an actual contract renegotiation by a MLP, it will be difficult to determine whether we are looking at a 5% or 25% reduction in revenue to MLP's.
The more immediate problem for the ETP/ETE family is how much capital it will takes to keep WMB at investment grade, assuming the merger is completed, and where will that capital come from. The proposed acquisition of NGPL by KMI started its precipitous share price collapse. The issue was the same one facing ETP: how to maintain investment grade on a soon to be acquired asset. KMI chose to reduce its dividend 75% and self fund this problem. ETP has yet to reconcile how it will maintain WMB's investment grade rating post acquisition and pay the cash consideration required in the merger agreement to WMB shareholders. Hopefully, this gets discussed on the cc.
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.