Once Energy Transfer Equity (NYSE:ET) completes its acquisition of Williams Companies (NYSE:WMB) sometime in 2016, it will have created an energy infrastructure behemoth. With a pro forma enterprise value north of $140 billion, it will rival the size of many of the industry's big oil players. That said, the transaction will add a meaningful amount of new debt to the company as well as adding to its complexity and its ability to engage in trades among its entities. Here's why these three things worry me.
The blended family
When Energy Transfer Equity completes its acquisition of Williams Companies, which will be renamed Energy Transfer Corp., the organizational structure will look like this:
It's a structure that will provide investors with six investment options consisting of a C corporation (the former Williams Companies and future Energy Transfer Corp.), a publicly traded pure-play general partner MLP (Energy Transfer Equity), and four affiliated MLPs, with a fifth MLP in the works. Because of this structure, Energy Transfer Equity is actually becoming more complex when the rest of its peers are reducing complexity by merging affiliated entities into one corporate entity. Williams actually was in the process of doing just that when Energy Transfer stepped in and stopped it. That said, Energy Transfer would have been even more complex if its own Energy Transfer Partners (NYSE:ETP) didn't just recently acquire former MLP affiliate Regency Energy Partners. Still, when most of its rivals are moving to just one entity, it makes Energy Transfer stick out -- and not in a good way.
Lots of insider asset trading
One of the benefits of having so many publicly traded entities is that it allows Energy Transfer Equity and its affiliates to trade assets among themselves with ease. In fact, it seems to be a bit too easy given that the transaction volume has been very heavy, with the slide below noting a flurry of internal transactions over the past year:
This year alone Energy Transfer Equity entities traded roughly $27 billion worth of assets among themselves using units or incentive distribution rights as currency. For example, Energy Transfer Partners and Sunoco Logistics Partners (NYSE:SXL) completed a trade whereby Sunoco Logistics Partners acquired a 40% interest in the Bakken Pipeline. In addition, Energy Transfer Partners, Sunoco Logistics Partners, and Energy Transfer Equity traded units as well as a general partner interest and incentive distribution rights as part of the $3.7 billion transaction. While the deal made sense because it moved oil assets from the more natural-gas-focused Energy Transfer Partners to the more oil-focused Sunoco Logistics Partners, and it cleaned up some of the internal complexity, it's still a transaction that is tough for the average investor to wrap their mind around, which gives me a lot of pause.
One of the kickers that Energy Transfer Equity used to convince Williams Companies to join its family was a large cash payout, which it is funding with debt. That cash component, when combined with the debt baggage Williams is bringing into the fold, adds over $10 billion in debt to the combined entity:
Now, that's debt that the company can handle given the strong fee-based cash flows of its entities, however, it is debt going out the door to pay shareholders instead of being used to build additional fee-based projects. The concern here is that it could limit the company's ability to take on additional debt in the future. That said, three of the company's MLPs have solid investment grade credit ratings of their own, and most of the future asset build-out would likely be at those levels. But in levering up at the Energy Transfer Equity level it could still hold the company back from corporate M&A or joining the rest of its peers in gobbling up its MLPs under one corporate umbrella.
I want to make it clear that I don't think that Energy Transfer Equity -- or any of its affiliates -- is destined to fail. However, I simply see the complex corporate structure, flurry of inside asset trades, and added debt as caution flags that need to be monitored. These issues could prove to be nothing, but they do add to the company's risks of running into a major issue, particularly when it comes to its ability to fund growth down the road.