Why Did ETE and ETP Surge after the 1Q16 Earnings Release?


May. 6 2016, Published 7:31 p.m. ET

Stock price reaction

Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP) rallied by 7.1% and 8.8%, respectively, following their 1Q16 earnings conference call. The Alerian MLP ETF (AMLP), which comprises 24 midstream energy MLPs, was up by 1.7%. In this article, we’ll discuss potential reasons for this surge.

Article continues below advertisement

The ETE-WMB merger

ETE’s shares started rising when ETE CEO Kelcy Warren, during the 1Q16 earnings call, stated that “we can’t close this transaction,” considering its legal advisor, Latham & Watkins, recently “concluded that it would not be able to provide the opinion related to the application of Section 721,” nor the huge amount of debt required to fund the cash portion of deal. Williams Companies (WMB) offered alternative proposals for the deal to avoid tax implications. However, ETE management doesn’t think “that fixes the issue.”

ETE would like to restructure the transaction to an all-equity deal. According to the merger terms, either of the parties can walk away from the transaction if it is not closed by June 28.

ETP’s 2016 capital plans

Energy Transfer Partners decided to lower its 2016 capital program by $1.4 billion to $2.8 billion from the previous guidance of $4.2 billion. ~$1 billion of the decrease is related to the financing of the Bakken Pipeline project and the remaining ~$400 million comes from project deferrals. ETP has deferred part of the capital spent on the Rover Pipeline and Revolution projects to 2017.

Apart from the $2.2 billion received from a Sunoco LP (SUN) dropdown, ETP expects to use its undrawn credit facility and ATM (at-the-market) equity offering to fund the remaining capex. ETP would raise money from equity markets to maintain a suitable leverage and an investment grade rating.

ETE waives incentive distribution rights

ETE has extended support to ETP due to its near-term capex plans and high-equity capital. It will be waiving the IDRs (incentive distribution rights) on any common unit issued after the closing of the merger until the fourth quarter of 2017. ETP forms 8.2% of the Global X MLP ETF (MLPA).


More From Market Realist