When you’re one of the largest master limited partnerships (MLPs) in the world, it takes some significant acquisitions to keep growing. Adding a small pipeline or terminal isn’t going to move the needle. And that fact was the rationale behind mega-MLP Energy Transfer Partners LP (NYSE:ETP) buy-out of rival Williams Companies Inc (NYSE:WMB).
With that merger ultimately failing, ETP was at a crossroads. Sure, it had a stable of organic projects on its docket, but how was it going to really grow?
The answer was to eat itself.
With its first quarter of earnings with former subsidiary Sunoco Logistics as a part ETP proper, Energy Transfer has continued its plans to transition to simpler and more efficient MLP. For investors, this transition could be the key to long-term growth and support for the firm’s big time dividend.
A Big Family of MLPs at ETP
MLPs are pretty complex animals and have many moving parts. So when you’re one of the largest MLPs and midstream firms, it’s safe to say that you’re complicated with regards to your structure. That has played out with ETP and its general partner Energy Transfer Equity (NYSE:ETE). As ETP and ETE have grown via acquisition, the pair has gotten a bit unruly. ETE has done an excellent job of eating other general partners to collect those juicy incentive distribution rights (IDRs) and other fees.
The problem is on the other side of the equation.
In addition to ETP, ETE controlled Sunoco Logistics Partners, refining/convenience store owner Sunoco LP (NYSE:SUN), non-publicly traded Energy Transfer LNG and PennTex Midstream Partners LP (NYSE:PTXP). And had it successfully swallowed WMB, Williams Partners (NYSE:WPZ) would have also been added to ETE’s mix.
All of this is pretty confusing — especially when looking at cash flows, support and who exactly owns who. Even worse is that investors in many MLPs have started to turn their noses at general partners that collect incentive distribution rights from their subsidiaries. In addition to this complex web of MLPs, the market for raising equity via new MLP issues all but dried up. The decline in oil prices and rising interest rates made that possible. For ETP and ETE, none of this is particularly good.
Which could be why the duo has started to take a page out of some rivals playbooks and eat their own subsidies for simplification purposes. It started with Regency Energy Partners back in 2015 and this year added Sunoco Logistics back into ETP.
And benefits have made themselves known with ETPs last earnings report which finally included Sunoco. The key was an improvement in coverage ratios for ETP’s generous 11%-plus dividend. Beforehand, Energy Transfer Partners wasn’t even covering its distribution and faced significant deficits in 2015 and 2016. However, with Sunoco added, that distribution coverage ratio hit 1.13x. That means ETP is earning more than its distribution in cash flows.
For investors, the addition of Sunoco into ETP only made it a strong MLP.
Going to Get Even Better for ETP
The addition of Sunoco Logistics was just step one for Energy Transfer. That’s because it’s going to fold PennTex into its mix as well. While the firm is smaller than ETP, PTXP has some pretty impressive operations of its own. But more importantly, those operations center on natural gas.
One of the reasons why ETP has had a hard time over the last few years is that it’s very oil-centric. The problems facing oil and its yoyoing price have been the main reasons why ETP has had such a hard time covering its dividend. Shale producer bankruptcies, work stoppages, and slowing drilling activity have hurt cash flows. By adding natural gas-focused PennTex into its mix, Energy Transfer should be able to boost its covered ratio even further.
PTXP in its short public history has been pretty impressive at growing its own cash flows and raising its own dividends. The addition of it into ETP is a smart move for all parties.
But the potential for ETE to fold other units into ETP is certainly there. While SUN is a bit of an odd bird with its convenience store assets. Those assets do include plenty of bunkering and terminaling/storage units. They’ll fit into ETP’s mold just fine as will Energy Transfer LNG.
In the end, the ability to simplify its structure and meld all its parts together makes a ton of sense when it comes to strengthening its distribution coverage and getting through its recent issues.
The Bottom Line
ETP is just the latest large MLP to hit just how far you can take the structure. By combining its vast empire of MLPS and assets, ETE is doing the right thing for Energy Transfer Partner unit holders. Cash flows and dividend coverage will only go up with the additions. And that could make it and its hefty double-digit yield a decent buy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.