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Why investors must watch future Energy Transfer and Targa merger

Why investors must watch future Energy Transfer and Targa merger (Part 1 of 5)

Why the Energy Transfer and Targa merger talk ended for now

Merger talk ends

On June 19, 2014, Targa Resources Partners L.P. (NGLS) and its general partner Targa Resources Corp. (TRGP) announced that they terminated “high level preliminary discussions” with Energy Transfer Equity L.P. (ETE) regarding acquisition of TRGP and NGLS by ETE. NGLS also stated in the press release that “no assurances whether or not discussions could resume or whether any agreement could be entered into in the future.”

Share Price NGLSEnlarge Graph

Leading up to the rumor of the possible acquisition, the share prices of NGLS and TRGP jumped up by 17.7% and 20.4% on June 19, respectively. However, the shareholders’ excitement took a blow following the disclosure of the breakdown of the negotiations between the companies. Share prices of NGLS and TRGP plunged by 14% and 8.3% on the following day, respectively. However, ETE’s share price showed positive movement following the news of the merger termination.

Share Price ETEEnlarge Graph

Targa Resources Partners L.P. (NGLS) was formed by TRGP in 2006. NGLS is a master limited partnership (or MLP) that owns and operates a diversified portfolio of energy assets in the midstream space. The company offers services in the gathering and processing of natural gas, natural gas liquids (or NGLs) and crude oil; and storing, terminalling, and selling of refined petroleum products. Targa Resources Corp. (TRGP) owns 2% general partner interest in NGLS.

Energy Transfer Equity L.P. (ETE), through its subsidiaries, provides diversified energy-related services. The company sells natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users, and other marketing companies. ETE’s reportable segments consist of its investment in Energy Transfer Partners L.P. (ETP), ETE’s investment in Regency Partners (RGP), and Corporate and other segments. Energy Transfer Partners (ETP) is one of the largest energy MLPs.

Along with owning general partner interest in ETP, ETE owns incentive distribution rights and about 52.5 million limited partner units, as well as additional GP/IDR interests in other partnerships. Investors may note that the management of the master limited partnerships (or MLPs) are managed by the general partner (or GP) which often has a 2% economic stake in the enterprise (the limited partner (or LP) unitholders have the other 98%) and the board of directors also sits at the GP level.

The general partners (or GP) sometimes have a special right to incremental distributions, dubbed incentive distribution rights (or IDRs). IDRs are incentive plans to give general partners in a limited partnership an increasing share of the distributable cash flow generated by the company. As per unit distribution increases to the limited partners, per unit distribution to the GP also increases, but at a higher rate.

CompsEnlarge Graph

As of June 29, 2014, TRGP had market capitalization of $5.8 billion and NGLS had market capitalization of $10.8 billion. ETE had a market capitalization of $32.5 billion.

Targa Resources Partners L.P. (NGLS) is a MLP operating in the midstream energy space. Targa Resources Corp. (TRGP) is the general partner of NGLS. NGLS is a component of the Alerian MLP ETF (AMLP) and the Yorkville High Income Infrastructure MLP ETF (YMLI). Energy Transfer Equity L.P. (ETE), through its subsidiaries, provides diversified energy-related services. ETE is a component of First Trust North American Energy Infrastructure Fund (EMLP).

To learn how the asset base and asset mix of NGLS-ETE combined would look like, please read our following section on “Why investors can expect synergies from the combined assets.”

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