As I’m writing this, Energy Transfer Equity LP (ETE), my choice in InvestorPlace’s Best Stocks for 2016 contest, has jumped into the No. 2 spot, up 15% for the year.
I have to write “as I’m writing this,” because the way this stock trades, it could look a lot different come tomorrow … or even five minutes from now. ETE is a stock that will regularly move 10% or more in a day.
Click to Enlarge It was just three months ago that I wrote my last update on ETE, and a lot has changed since then. The stock was down by about half, and I was smack dab in last place.
Well, the stock has now more than doubled, in addition to making another quarterly dividend payment. With six months left in the year, ETE has a very legitimate chance of taking the prize.
So what’s the story here? Why the rapid turnaround, and what should we expect for the rest of the year?
It’s all about the would-be merger with Williams Companies Inc (WMB). ETE’s plans to buy Williams were bold and aggressive … yet they only made sense with oil and gas prices a lot higher than we see today. The sticking point was the $6 billion in cash ETE would need to bring to the table to close the deal.
An all-stock deal would have been fine, but in today’s credit environment ETE would almost certainly have been forced to slash its distribution to come up with $6 billion. And even then, it would have been hard to make it happen at a non-usurious interest rate.
The recent jump in the ETE stock price comes as it looks more and more likely that ETE will get to walk away from the deal. ETE is claiming that the deal cannot be completed because it can’t get a clean tax opinion from its lawyers on whether the deal would create a taxable event for Williams shareholders. Williams is countering that this is a stalling tactic to allow ETE to walk away from the deal.
In the end, it will all come down to the Vice Chancellor Sam Glasscock’s decision on whether ETE and its tax lawyers acted in “good faith” to resolve the tax issue. Well, it’s hard to “prove” a lack of good faith. So investors are expecting Glasscock to rule in favor of ETE, which for all intents and purposes will kill the deal. The merger automatically dies if it isn’t closed by June 28.
We shall see. If the judge decides that ETE and its lawyers acted inappropriately … well, let’s just say I probably won’t be in second place in the contest anymore.
So, what happens next?
Assuming the judge rules in ETE’s favor, which I expect, ETE should have a strong finish to the year. I expect ETE to tack on another 15% to 20% or more this year, along with another 4% to 5% in cash distributions.
Will that be enough to take the crown this year? We shall see. Jason Moser is off to a fantastic start in Ellie Mae Inc (ELLI). So an ETE win might require an ELLI stumble. But with six months left to go, anything can happen.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas. As of this writing he was long ETE.
