Pipeline giant Energy Transfer Equity LP (ETE), which happens to be my pick this year in InvestorPlace’s Best stocks for 2016 contest, reported its quarterly earnings on Wednesday, and by and large the results were decent.
Shares of Energy Transfer were up about 2% after hours and opened about 8% higher this morning.
Earnings per share came in at $0.30 per share, beating the consensus estimate of $0.24 per share. Distributable cash flow per unit, the earnings metric most widely followed for Master Limited Partnerships, came in at $0.33 per unit, up a respectable 10% over the same quarter last year.
Decent Earnings for ETE
And this is despite a truly horrendous year for oil and gas prices. All in all, it was a decent quarter for Energy Transfer Equity, if not necessary something to write home to mom about.
ETE also made sure to reiterate a few recent announcements in its earnings release. The company declared its quarterly distribution late last month, and Wall Street was thrilled that Energy Transfer was able to hold it steady at $0.285 per share.
There was significant concern that ETE would be forced to slash its distribution. At current prices, that works out to a sweet 9% yield. And Energy Transfer was also sure to mention its private offering of 329 million convertible preferred shares.
These convertible preferred shares were an interesting development when they were first announced last month. They defer current distributions, allowing ETE to hoard its cash, ostensibly to fund its pending takeover of Williams Companies Inc (WMB).
Yet in an interesting twist, Williams protested the move, alleging that it puts Energy Transfer Chairman Kelcy Warren higher in the capital structure than rank and file shareholders (and technically it does, as preferred shareholders have priority over common shareholders in terms of distributions paid or assets recovered during a bankruptcy).
At any rate, WMB and ETE are now suing and counter-suing each other over the share issue. It looks like this will be settled in court.
This brings me to the elephant in the room: the Williams takeover.
Can Energy Transfer Weather This Storm?
Energy Transfer Equity stock has been soaring recently, having actually tripled off its low set earlier this year. But its strength in recent weeks hasn’t been due primarily to rising crude oil prices or to outstanding operating results. Instead it’s been fueled by speculation that the deal to acquire Williams will fall through.
Ironically, it was the Williams deal that put ETE on the map for a lot of investors. The combined company would be even larger than mega operators Kinder Morgan Inc (KMI) and Enterprise Products Partners L.P. (EPD). But the excitement for the deal went into deep freeze with the plummeting prices of oil and gas.
Because of the massive cash component of the deal — ETE is obligated to pay Williams shareholders $8 per share in cash — the merger is now seen as a major liability to Energy Transfer at a time of lower energy prices. And ETE is obligated to go through with the merger.
There is no “out clause” on Energy Transfer’s end.
And here, the plot thickens. While Energy Transfer Equity seemed to have no concerns about tax issues when it first negotiated the merger last year … it now conveniently believes that completing the merger would create a major tax liability and issued a statement on the matter. The IRS already informally gave the deal the green light, but ETE now wants additional assurances.
Investors see this and draw the conclusion that, one way or another, Energy Transfer will find a way to torpedo the deal. They’re certainly pulling out all the stops. But will it work?
We shall see.
So is Energy Transfer Equity still a buy? Absolutely. Even if the deal goes through — I’d put it at about 75% likelihood it won’t at this point — ETE is at the top of a pipeline empire that includes Energy Transfer Partners LP (ETP), Sunoco LP (SUN) and Sunoco Logistics Partners L.P. (SXL).
With or without WMB, Energy Transfer is a distribution-growing powerhouse.
I thought ETE was a steal in the mid-$20s. At $13 per share, it’s dirt cheap. So at current prices, deal or no deal, Energy Transfer is a very decent buy.
Accumulate the shares, reinvest the distributions, and wait for the mess with Williams to sort itself out.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long ETE, KMI and EPD.
