Please ensure Javascript is enabled for purposes of website accessibility

Shares of Energy Transfer Slide in October After Acquisition Announcement, Pipeline Spill

By Tyler Crowe – Nov 7, 2016 at 1:18PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street didn't seem to like the structure of the recent Energy Transfer Partners acquisition and how it will impact Energy Transfer Equity

What happened? 

Shares of Energy Transfer Equity (ET 1.97%) fell 14% in October following the announcement that Energy Transfer Partners (ETP) acquired the general partner stake in PennTex Midstream Partners (NASDAQ: PTXP) and its other subsidiary, Sunoco Logistics Partners (NYSE: SXL), said that one of its refined product pipelines in Pennsylvania leaked. Shares of Energy Transfer Partners and Sunoco Logistics Partners were also down 6.3% and 12.6%, respectively.

Image source: Getty Images.

So what?

Ever since the Energy Transfer/Williams Companies drama came to a close earlier this year, Energy Transfer has said that it wanted to still be active on the acquisition front, and this month proved it as Energy Transfer Partners acquired the general partner stake and a 65% limited partners stake in PennTex Midstream Partners. As per the announcement of the deal, Energy Transfer Equity said that it will waive $33 million in incentive distribution rights from Energy Transfer Partners in perpetuity to help fund the deal. This, of course, will impact the total amount of cash coming in the door for Energy Transfer Equity to pay its own dividend. The use of incentive distribution rights has been a common method for Energy Transfer Equity to help facilitate other acquisitions at the partnership level of the business, but they are typically for a set amount of time. The fact that this one will go in perpetuity is what is rather strange about it.

ETE Chart

ETE data by YCharts.

If this wasn't enough for investors to digest, Sunoco Logistics Partners also announced that a leak occurred at one of its refined petroleum product pipelines in Northeast Pennsylvania on Oct. 21st, spilling about 1,300 barrels of gasoline into a river. Any time a company announces a spill there is going to be an immediate panic, and there will likely be some spill related costs, but this is a relatively smaller spill. It wasn't enough to impact the company's dividend, though, because on Oct. 27th Sunoco Logistics announced its 46th consecutive quarterly dividend increase.

Now what?

Energy Transfer has always been very aggressive about making acquisitions, and occasionally it doesn't work out as perfectly as one might hope. The fact that Energy Transfer Equity is taking a perpetual incentive distribution cut is a rather strange one, but the thinking may be that the gains in distributions from PennTex will help to offset those over time. 

Of all the issues facing Energy Transfer Equity, they all pale in comparison to the company's rather onerous debt levels. With net debt to EBITDA at 7.8 times, it is going to get harder and harder for the company to access cheaper capital to grow the business. Hopefully when the company announces earnings after the market closes on Nov. 7th, we will get to see some progress on this front.

Tyler Crowe has no position in any stocks mentioned.  You can follow him at or on Twitter @TylerCroweFool.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.