Acquisitions are supplying Energy Transfer (ET -0.92%) with lots of fuel this year. The master limited partnership (MLP) closed two sizable deals last year, while its affiliate, Sunoco (SUN 0.48%), recently made a needle-moving acquisition. This trio of deals has the company on track to grow its earnings by around 10% this year.
The MLP made it clear on its first-quarter conference call that consolidation in the midstream space continues to make sense. Here's a look at what the company is seeking in future deals.
Adding value to the value chain
Energy Transfer's co-CEO and CFO, Tom Long, discussed the company's acquisition strategy on the call. He stated that the MLP is always looking for an opportunity that would "feed all the way downstream." He said, "We always like to talk about how we go from wellhead to the water, and we do it across all the commodities."
Long noted that the company's strategy is to look for opportunities to buy assets that feed into its value chain of driving commodities from upstream wells to downstream markets, like refineries, petrochemical plants, and export facilities. That provides it with great opportunities to capture commercial synergies and cost savings.
For example, the company is currently working on a debottlenecking project on the Gateway pipeline that will allow it to fully utilize its interest on the EPIC pipeline. The project will allow the MLP to optimize deliveries from the Delaware Basin to its Mont Belvieu complex. It's one of several synergy projects it's working on related to the Crestwood acquisition. They help drive the company's view that it will capture about $80 million of cost synergies, double its initial estimate, and significant commercial synergies to move more commodities through its network. These additional synergies make already accretive deals even more value-enhancing for the MLP.
The Sunoco fit
The company usually makes these deals at the Energy Transfer level. However, Sunoco's acquisition of NuStar showcased how its controlled MLP can also make highly accretive deals that flow down to Energy Transfer. The company will get a $500 million earnings boost from Sunoco's deal this year. Long noted on the call that Sunoco would probably continue to make highly accretive acquisitions that allow it to capture commercial synergies that benefit its wholesale fuel distribution and terminal businesses. While that entity typically makes asset acquisitions, the NuStar deal shows that it can make very accretive acquisitions of public companies.
In addition to using Sunoco as an acquisition vehicle, Energy Transfer sees potential partnership opportunities with the MLP. Co-CEO and Chief Commercial Officer Mackie McCrea noted that there's some overlap between Sunoco's assets, including those acquired in the NuStar deal, and Energy Transfer's operations. As a result, "there's a real benefit in potentially partnering up with them." He noted that the two companies were already discussing potential partnerships and joint ventures that could be accretive to both entities.
Poised to pounce
Despite making two big acquisitions last year, the company's financial position "continues to be stronger than any time in Energy Transfer's history," Long said on the call. That gives the company ample flexibility to pursue new growth opportunities, including acquisitions and partnerships, while also returning more cash to investors through a rising distribution and equity repurchases.
Sunoco has also proved that it can make highly accretive deals, and both companies are likely to continue making acquisitions. Energy Transfer just needs to find the right opportunity that's accretive and enhances the value of its value chain. Future accretive acquisitions would enable the MLP to continue growing its cash flow so that it can return even more money to investors.
