While pipeline and processing company Energy Transfer Partners (NYSE: ETP) has endured a tough couple of years, it appeared to have turned the corner last quarter. Not only did earnings and cash flow head higher but one of its largest (and most controversial) projects entered service and is now generating cash flow. While the company still has lots of work ahead of it, management believes it's heading in the right direction. That was evident from the comments they made on the accompanying conference call, where they detailed five points that suggest better days lie ahead for investors.
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Two major strategic moves completed
CFO Tom Long led off the call with a brief strategic update. First, he noted that the company signed an agreement to sell a minority interest in its Rover pipeline project to funds managed by Blackstone (NYSE: BX) for $1.57 billion. That's a significant deal for this equally controversial project because it shows Blackstone's faith in both Energy Transfer Partners and this project. Furthermore, as Long notes, the transaction is crucial from a financial standpoint:
After the closing date, Blackstone will contribute specified amounts of Rover's future construction cost and will also make certain additional payments to ETP. Immediately upon closing, we plan to use the proceeds to pay down debt; therefore, reducing our leverage and to help fund future growth projects.
Meanwhile, Energy Transfer also closed its acquisition of PennTex Midstream Partners, which bolsters its midstream segment.
Growth projects are ramping up
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Long then spent time on the call updating listeners on the company's growth projects, noting that "we have several projects completed and ramping up and others in the construction phase progressing toward completion." The most important recent completion is the Bakken pipeline project, which entered commercial service on June 1 and is now delivering crude to refineries in the Midwest and Gulf Coast. Meanwhile, one noteworthy update was that the Rover pipeline should enter full commercial service by January of next year. He also stated that they "continue to make significant progress on the construction" of Mariner East 2 and have resolved many of the issues it had with the state of Pennsylvania. The completion of these projects is crucial for Energy Transfer given that the company expects them to generate significant future earnings and cash flow.
Shore up liquidity position, just in case
While Energy Transfers' building boom should drive growth, paying for all these construction projects has proven to be problematic given the impact the oil market downturn has had on its finances. That situation forced the company to get creative to ensure it has the capital needed to fund these expansion projects. Long noted that Energy Transfer continues seeking out creative solutions and is having "ongoing constructive conversations with strategic partners around Mariner East 2 and ME-2X joint venture." It could potentially participate in a unit repurchase program with Sunoco LP (NYSE: SUN) as well after it completes the sale of its retail business later this year. Long noted that Energy Transfer could bring in up to $1 billion in cash by selling its Sunoco LP units.
One other thing Long noted is that the company could sell additional equity to bolster its liquidity. It made this very move shortly after the call, selling $1 billion in units, which it believes will provide it with enough cash to finance its growth projects through the middle of next year. Given that liquidity injection, it doesn't need to be as creative, though it will likely continue to work through those options.
Follow the crowd
Later on during the call, analyst got to ask questions. One asked management what its thoughts were about completing a transaction that would eliminate the expensive incentive distribution rights (IDRs) held by parent company Energy Transfer Equity (NYSE: ETE). CEO Kelcy Warren took that one and stated that, "yes, we have thought about that. We are looking at all of our options right now of what would be -- if there's an interim step that can be done sooner. So, yes, we've looked at that." Several of its peers have completed similar transactions in recent years, including Williams Companies (NYSE: WMB) after its proposed merger with Energy Transfer Equity fell apart. After reviewing a range of options, Williams chose to simplify its relationship with master limited partnership Williams Partners (NYSE: WPZ) by eliminating the IDRs in exchange for additional units of its MLP. Given that most rivals have eliminated their IDRs via a consolidation transaction of some sort, it seems likely that Energy Transfer will follow suit.
Too tired for more M&A right now
Energy Transfer has been an active acquirer over the years and had been quite successful before the Williams deal fell apart. Given that history, an analyst asked management about its current appetite for mergers and acquisitions. The CFO took that question and said:
We have very little appetite. We are tired. I mean, it's been a tough year for us, tough couple of years. And we're to get these projects on line and creating distributable cash flow for our unit holders. And the future looks really bright for us. I think it's time for us to take a little break on M&A. Again, unless the perfect deal was available to us and -- we would be opportunistic in that case. But I don't see that right now.
As Long points out, given the company's recent struggles, it has decided to take a step back while it waits for its expansion projects to prove their earnings power to investors.
Getting better but there's still more to do
Energy Transfer Partners' second-quarter results show that the company has finally started to turn the corner. However, it still has a slew of expansion projects to finish. It also needs to continue shoring up its financial situation, and has to find a solution to eliminate those IDRs. As it makes progress on each remaining initiative, it should slowly remove the weight that has been holding down the unit price, which has the potential to fuel big-time returns for investors who aren't afraid of the risk that the company could stumble along the way.
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