It takes years of planning to merge entities such as this. Kinder did it only after talking about it for years. He even recommended KMR was a better deal that KMP, and you know what it was. During the merger KMR has zero tax consequence while KMP got hit hard.
The div cut at KMI also had nothing to do with the merger. Post merger Kinder went on a buying binge and took debt way too high. The credit markets called him on it and he slashed the div for 2 years to pay down debt. After 2 years the div will go right back to where it was and then some.
A merger of the ETE family would be great in the long term. I had EPD, EPE and something else in the family and the merge has been fantastic there.
Also in my experience the GP usually gets a better deal. This was true for EPD/EPE, true for KMI/KMP/KMR, is true today for TRGP/NGLS.
Basically what happens is the LPs take a div cut in return for higher growth over time. This enables the combined entity to pay out less in distributions then it did before and use the extra cash flow to grow.
What is crazier is NGL is one of the few midstream with growth still expected. Wells Fargo recently updated their EBITDA forecasts and they had NGL as one of the ONLY midstreams growing and forecasted $650M EBITDA in 2017. That puts NGL's market cap at less than 1x EBITDA in 2017.
I have never seen something so low. I could understand if they had a critical debt issue, but they don't. They don't even have to access any public funding for 1.5 years. By then oil will be higher again and worse case is NGL holds the distribution flat and pays for projects out of excess cash flow.
Looking at NGL's businesses, so are at risk but some are OK. For example in propane they are paid on the margin of retail over wholesale, this margin actually INCREASED in the last quarter because wholesale price fell so far.
Is retail propane going away? No. This and a decent chunk of other cash flow is mostly OK, and selling for
Agree on ETE and CEQP.
Also look at ETP. ETE has a debt issue which is why it's down to stupid levels, but the market also took ETP down with it which has none of those issues. ETE offers higher stock appreciate and dist growth over time, but ETP is essentially a locked in 20% yield with little risk.
CEQP hit 60% yield which is nuts, sure some business is at risk, but some business (like storage) is rock solid, Oil could go to $10 for years and CEQP would be sustainable with a half dist cut, which is still 30% yield on today's price.
We saw all of this in 08/09, MLPs are cyclical. Oil will recover within 2-3 years and many of these stocks will be up 500% to 1000%. And you get paid to wait.
So they decided to bring another partner on board to fund part of the project and diversify risk. This happens all the time in this space.
It was actually a smart decision that lowered their capex needs, just as selling the Trans assets (for a 50% profit in 1.5 years) was a smart decision to lower leverage. This shows management is buckling down to get through a difficult time.
Oh, and EBITDA is expected to be $450M at these oil prices. That means they're still very cash flow positive even in a low oil environment.
NGL is priced as if it is going BK soon. We saw the same thing in 08/09. The reality is cash flow will lower some, but the firm is OK. Absolute worse case is they decide to lower the distribution for a couple of years to either fund more growth or pay down debt or by back shares. These would all be good things to do.
They could slash the distribution by 2/3 and still have a yield on cost of 20%. With that 20% yield CEQP would have a significant coverage ratio of much higher than 2x, be able to fully fund any growth out of internal EBITDA, rapidly pay down debt and easily cover even the worst possible reductions in business cash flows.
They need to cut here and use that money for better purposes. Heck they could buy back half of all shares in less than two years, that is probably the absolute best use of cash at these levels.
From the report
"Sold TransMontaigne GP LLC on February 1, 2016 and reduced indebtedness by approximately $350 million with the cash proceeds. As a result, NGL will deconsolidate the TransMontaigne Partners LP (“TLP”) financials from the NGL financials going forward and indebtedness will decrease by an additional $248 million (TLP Revolving Credit Facility) in future SEC filings."
EBITDA also came in slightly lower on a 3-month basis, but up on a 9-month basis. They are still generating cash and have decent coverage at this point.
"In the event of ETE default, the creditors will exercise the option to convert the GP interest and the IDRs into partnership units...this will result in dilution to current unit holders of somewhere between 70-90% depending on the value of ETP."
That is the biggest bunch of nonsense. The structure is designed to protect LP owners first. GP owners only get paid if the LP does well.
If the GP goes bankrupt the creditors take ownership of the IDRs. That is all that happens.
ETP is a steal today.
So the committed financing is only for a 1 year bridge loan.
That is bad, it means that after the deal goes through ETE has 1 year to find $6B somewhere. Given today's pricing that is unlikely, especially given that ETE will be highly leveraged at that point and probably over it's covenants.
This was a horribly structured deal.
Well the good thing is the underlying assets are strong and generate cash. ETE can ax the distribution as KMI did for a 2 year period and pay it down. Then in 2018 ETE will be looking at a $2/yr distribution according to most estimates, and people will look at today's price as the deal of a lifetime.
But again, this deal was horribly structured. My god it was horribly structured.
I keep hearing that the financing for WMB was already secured. Does anyone know how so? Is the amount and interest % locked? Can the banks back out? Basically where is ETE getting the $6B from and on what terms. At this point ETE is paying out most of their value for this deal....
But here is the thing. ETE is a non-operating entity, it is really just a pass through entity that they levered up with the WMB deal.
ETP, SXL and SUN are all fine. Cash flow remains strong and they have reasonable debt and strong growth stories.
If ETE breaks it's covenants or credit ratings, it just makes it harder for ETE to borrow more or support ETP/SXL/SUN (who don't need support). ETE probably will need to lower the distribution a bit until it pays down debt, but when that is over ETE is set to be paying out $2 per share. Buying today could easily net a 50% yield on cost in 2-3 years.
Frankly I don't care if they suspend the distribution for a bit, as long as cash continues to flow to ETP/SXL/SUN (which it will) then ETE will live to see another day.
Management was very proactive in addressing this downturn, unlike most other MLPs.
They quickly decided to sell of assets and managed to raise $300M in that sale in Dec in a manner that did not affect cash flows at all. (and actually turned a profit from their purchase price 2 years earlier)
This was a smarter move to do early than any of the other MLP management teams took. Look at ETE their management locked them into a risky acquisition that increases debt significantly and it is killing the stock. Same thing with KMI, it was the debt that got them.
Frankly I have high confidence in NGL's management right down, they addressed the oil price crash immediately and deleveraged enough to survive a longer than normal downturn.
" ETE/WMB is just a big gasser, and the combined systems have so much coverage it really doesn't matter what basin is performing or not, just that gas flows in the lower 48, and that volume is expected to increase."
This is it in a nutshell. The only issues are will ETE be able to handle the debt load. If the financing is already lined up (which it sounds it is) then ETE is OK. It still has lots of cash coming in from ETP and SXL.
The only issue I see is debt covanants, it sounds they might break them now after the deal goes through. If that is the case then ETE might have to suspend distributions until it pays off the debt, and might have to get creative on any debt coming due (which isn't much).
At these prices who cares. Wait an extra year for distributions and then they will flow again at a massive yield on cost. Seems a no brainer to me.
He can't because a bankruptcy at the parent ETE does not affect ETP. The reverse might be true, but that is not what we are looking at here.
SXL, SUN and ETP will continue to be the cash engines they are are, the only difference is massive fear will create the buying opportunities of a lifetime.
Oh BTW, SXL just raised it's dividend AGAIN. All those IDRs continue to flow to ETE same as always.
You clearly do not understand the structure here. ETE is the parent of ETP. Anything that happens at the ETE level has zero effect on ETP. ETE could go bankrupt and wipe everyone out, and ETP would be unaffected. Cash come from ETP's assets which is then passed on to ETE. Not the other way around.
ETP would also jump to 2.2x coverage, have zero need to ever raise equity again, be able to fund massive growth and pay down debt which is already reasonable.
All on top of relatively secure assets with stable cash flows and massive growth already planned by 2017 with the next export capability.
The pricing today is reaching absurd levels. It is all due to fears related to the WMB purchase and CHK exposure that comes through that. ETE should kill the deal, pay the small penalty and move on.
Absolutely agree, I own a very small amount of WMB but a lot more of ETE.
The deal is a drag on ETE now, it significantly over leverages the firm while at the same time puts cash flow at risk due to WMB's exposure to CHK.
If the deal is cancelled all of the over hang goes away. ETE could be back to $20 in no time. ETP is secure, SXL is growing like crazy. What's not to love, except for that massive debt pile from the WMB deal.
The real question is post-BK how will the existing assets be used.
I don't care if CHK goes BK and re-organizes. I do care if CHK assets will continue to produce liquids that need to be moved, that is all that matters at the end of the day. BK is just a re-org of ownership.
Buybacks lower future dividend payouts since there are less shares. At these prices every $4 of buyback saves NGL $1 every this year and every single year going forward. If NGL is still generating cash (which it is) this is the highest return for the company, much more than any new project could offer.
NGL has the lowest leverage in their sector at 3.0x, they are well positioned to ride out a depressed period in energy. They also have some massive growth already fully funded that will turn on in 2017, while most Midstreams will see lower cash from operations, NGL's cash from operations are set to grow. In three years today's prices will be seen for the steal that they are.