Energy Transfer Partners (ETP +0.00%) has really accelerated its capital spending over the past three years. Yet over this same time period, ETP shares have stagnated. One of the biggest reasons is the company's failure to raise its distribution, which has stayed constant at $3.58 per unit since the second quarter of 2008.
But looking ahead, the prospect of a distribution increase looks much better. The company's various acquisitions and growth projects, some of which came to fruition this year, should finally have a positive impact on cash flow. Let's take a closer look at one of ETP's largest acquisitions and what impact it may have on the company going forward.
Assets acquired from Sunoco
The Sunoco acquisition is probably the best known of ETP's recent acquisitions. The deal was closed back in April for $5.35 billion. Through Sunoco and Sunoco Logistics Partners (NYSE: SXL), ETP amassed 5,400 miles of pipeline transporting crude oil, 2,500 miles of refined product pipeline, 40 miles of pipeline transporting natural gas liquids (NGLs), and one NGL storage facility.
The benefits here are quite obvious. With this acquisition alone, ETP went from being a partnership focused exclusively on natural gas pipelines to one with exposure to crude oil, NGLs, and refined product. Currently, only about a quarter of its business is derived from intrastate natural gas pipelines, down from more than half just three years ago.
Risks and benefits of the Sunoco acquisition
Many analysts have suggested that ETP has no business handling Sunoco's marketing and retail assets, which include 4,900 retail gas stations. After all, the main reason ETP acquired Sunoco was its crude oil and refined product assets. However, CEO Kelcy Warren has decided to hang on to the retail gas stations, instead of selling them as some analysts had expected.
While it's true that ETP doesn't have the expertise to manage the service stations, Warren argues that the former Sunoco managers who are now at ETP know the petroleum marketing business extremely well and can guide it in generating reliable cash flows.
The Sunoco acquisition also gives ETP some crucial exposure to the Northeast energy markets, where most of Sunoco's pipelines are located. Sunoco Logistics' assets traverse wide swaths of the Northeast all the way down to Oklahoma and Texas, which provides ETP access to two prolific natural gas and NGL plays -- the Utica and the Marcellus.
Access to important plays
You may be thinking: "But why would you want access to natural gas plays? Aren't all the energy companies drilling for oil right now?" While it's true that the gas-directed rig count fell to a 13-year low of 422 in October -- down more than 50% since peaking in October 2011 -- reflecting the reluctance of major gas producers such as Chesapeake Energy (CHK +0.00%), Ultra Petroleum (UPL +0.00%), EXCO Resources (NYSE: XCO), and Devon Energy (DVN +0.57%) to drill amid depressed prices, there are some encouraging signs.
First, while drilling has indeed declined in the Marcellus over the past year, this fact is mainly reflective of a decline in the dry gas regions of the play. In contrast, the counties that constitute the "wet gas" area of the Marcellus actually saw an increase in the year-on-year rig count, according to oilfield services company Baker Hughes.
Despite massive curtailment of dry gas drilling, average production of natural gas in the Marcellus actually rose more than 70% from October of last year to October of this year. Looking ahead, the Marcellus, which is often hailed as the most economical gas play in the country, is expected to see a nearly 80% surge in output over the next three years.
And in the Utica, which attracts more oil-focused companies than the Marcellus, the rig count doubled in October of this year compared with the same month last year, according to data from the Energy Information Administration (EIA). While the vast majority -- 86%, according to the EIA -- of active rigs are said to be drilling for oil, this figure probably includes companies drilling for natural gas liquids as well.
Final thoughts
ETP's acquisition of Sunoco has served an important purpose. It has provided the company with much-needed exposure to crude oil, NGLs, and refined product assets, which has major diversification benefits. Thanks to the assets acquired from Sunoco, ETP now boasts a "best in class" logistics and transportation platform for natural gas, NGL, crude oil, and refined product.
However, while I expect the consequences to be broadly positive, the full extent of the impact of the Sunoco acquisition will depend on management's ability to realize meaningful synergies, as well as industry conditions and other external factors.
According to the partnership's own projections, the acquisition should account for roughly a third of its future cash flow. Once the acquisition starts to become accretive to earnings and cash flow, I suspect distributions should start to grow again. And once ETP raises its distribution, its share price will almost certainly follow suit.
