After several challenging years, Energy Transfer Equity LP (ET 0.45%) is starting to turn things around, which was evident in its strong second-quarter results. That has members of the company's management team excited about what lies ahead. On the accompanying conference call, they highlighted three things fueling their optimism:
1. We're creating one strong company
After lots of analysis and discussion, Energy Transfer Equity recently announced that it has agreed to merge with its MLP Energy Transfer Partners (NYSE: ETP) in a $27 billion deal that will create a nearly $100 billion energy infrastructure behemoth. In addition to increasing the size and scale of the company, several other reasons were highlighted by CFO Tom Long about why the company is happy to finally be able to announce this transaction:
[It is] expected to be immediately accretive to ETE's [distributable cash flow] per unit. We expect to maintain ETE's distribution per unit at its current level. In addition, the transaction will create a more simplified ownership structure, as we are eliminating the [incentive distribution rights], which will improve our overall cost of capital. This will allow us to continue pursuing accretive growth capital projects and strategic [merger and acquisition] transactions. It also increases retained cash to accelerate deleveraging.
Overall, management believes that the combined company can generate enough cash to cover its 6.7%-yielding payout by a healthy 1.6 to 1.9 times. That will leave it with about $2.5 billion to $3 billion of annual retained cash, Long said, greatly reducing the need for external common or preferred equity funding. That will make it easier and cheaper for the company to finance expansion projects, which should enable it to earn higher returns.
2. We're working on expanding some oil pipelines
Speaking of expansions, while the company has several still underway, management hinted that it has a few more in the works. First, the company said that it could expand its recently completed Dakota Access Pipeline, which has been transporting an average of around 500,000 barrels per day (BPD), close to its 550,000 BPD capacity.
Because of that, chief commercial officer Mack McCrea stated on the call that "we are looking at expanding it. We hope to be able to do that in the near future," noting that "we have the ability possibly to expand at least 100,000 BPD as we complete our analysis."
The company is also looking at a variety of oil pipeline expansion projects in the Permian Basin, including building the Permian Express-4 pipeline, which could move about 100,000 BPD. On top of that, it's working on a potentially larger project with its joint venture partner Magellan Midstream Partners (MMP -0.53%). Long noted that the company had made "significant progress with our new 30-inch crude oil pipeline joint-venture project with Magellan and other strategic partners" that would "provide unprecedented flexibility from the Permian Basin."
McCrea stated that the company feels very good about its discussions with shippers, and thinks this project "would add at least another 1 million BPD" of oil pipeline capacity to the region by 2020, which is up from the 600,000 BPD capacity Magellan and Energy Transfer initially anticipated.
3. We hope to resume M&A soon
Finally, an analyst on the call asked management for its thoughts on corporate mergers and acquisitions (M&A) going forward. COO Matt Ramsey addressed this one by stating "we believe ... that to correctly run these partnerships, you should mix the correct amount of M&A with organic growth." However, he noted that this has been virtually impossible for the company due to how much its challenges over the past few years have weighed on its equity valuation. Because of that, it has been out of the market, which the company regrets.
That's why it's working hard to shore up its financial profile so it can pounce when the right opportunity -- that's both strategic and accretive -- comes around. While Ramsey did say that "we are not seeing any bargains right now," management plans to study things as they become available "and hopefully resume our M&A activity in the not-too-distant future."
Better days appear to be just ahead
Energy Transfer Equity's management was brimming with optimism on its second-quarter call about what it sees ahead. Driving that view is the merger with Energy Transfer Partners, which will create one stronger company with increased financial flexibility to not only invest in expansion projects but pursue corporate M&A. Management believes those two growth drivers have the potential to create more value for investors, which is what has it excited about the future.