What: Shares for every company under the Energy Transfer name -- Energy Transfer Partners (ETP), Energy Transfer Equity (ET 0.86%), Sunoco Logistics Partners (NYSE: SXL), and Sunoco LP (SUN 5.61%) -- all saw large declines in September, highlighted by Energy Transfer Equity's 25% drop following the announcement it had completed its merger with Williams.
So what: Let's start with one thing. The deal regarding Williams has little to no impact with the existing subsidiaries under Energy Transfer Equity. All of them may receive some slightly better financing since the parent company might secure a better credit rating. Other than that, though, management has so far indicated that they will all operate as separate entities under the Energy Transfer universe.
As far as the operating subsidies go, this past month was more a reflection of a weaker overall market for oil and gas and master limited partnerships than one particular issue for each of these companies. Considering that the Alerian MLP Index declined 15% in September; Energy Transfer Partners, Sunoco Logistics, and Sunoco were already fighting major headwinds.
For Energy Transfer Equity, it appears that investors were not too enthused with the merger. The one thing that Energy Transfer certainly has going for it with this deal is that the price tag is considerably lower than its initial offer back in May. That being said, the addition of Williams into the mix also means that it will need to secure financing from the parent company just like the rest of the Energy Transfer subsidiaries. Since it has to make investment decisions across five separate MLPs with an additional LNG terminal thrown in, Energy Transfer will have to raise a lot of capital.
Now what: For the operating subsidies like Energy Transfer Partners, Sunoco Logistics, and Suncoco, one challenge that this price decline presents is that it makes issuing equity as a source of capital for projects that much more expensive. New units mean more money laid out in the form of distribution payments, which is compounded by Energy Transfer Equity's incentive distribution rights. If equity issuances become a less lucrative method for raising capital, it could slow down the rate of new projects and, by default, distribution growth. If shares rebound, then this may not be as much of a problem, but certainly something worth checking up on from time to time.
For Energy Transfer Equity, the real test will be in its ability to show investors that this deal was worth the trouble. Some things to look for is if the company can secure a higher credit rating, better contract rates to use the combined networks options, and its ability to cut some operational costs. If we can see these things, then Energy Transfer Equity's losses this past month may be a little overblown.
