On the one hand, 2015 was a really tough year for Energy Transfer Partners (ETP +0.00%), which is evident by the fact that its units ended the year down 48.6%. Having said that, it was a very transformative year for the company, which put it in the position to have a very strong year in 2016. Because of this it is not beyond the realm of possibilities that the company could rebound above its all-time high of around $67.50, which it set at the end of 2014. Here's what has to happen for the company to have its best year yet.
Finish the transformation it began in 2015
Energy Transfer Partners started 2015 with a transformative deal to acquire affiliated MLP Regency Energy Partners in an $18 billion unit-for-unit transaction. When announced, the deal was expected to be break-even to distributable cash flow in 2015 and accretive thereafter, suggesting that 2016 is the year that Energy Transfer Partners would see the transaction begin to pay dividends.
In addition to that deal, Energy Transfer Partners also dropped down its fuel distribution and retail marketing assets to Sunoco LP (SUN 4.02%) in three separate transactions. In doing so it picked up enough cash so that it now only has a modest amount of equity funding still left to source so that it can fund its 2016 capital program. That's significant considering how far the company's equity value has fallen this year. It is also worth noting that those transactions brought with them a meaningful equity stake in Sunoco, which Energy Transfer Partners can sell down to raise the equity capital it needs. Further, Energy Transfer Partners also traded its ownership interests in Sunoco's general partner to its own general partner in exchange for its units that were owned by the general partner. This exchange was akin to buying back 5% of its outstanding units, which strengthened its distribution coverage ratio.
While those transactions were a big leap forward, in order for Energy Transfer Partners to complete its transformation to a pure-play midstream MLP it still has a few assets that it needs sell. Topping that list are the general partner and incentive distribution rights of Sunoco Logistics Partners (NYSE: SXL) that it still owns. Trading these assets to its own general partner, which is in the process of transforming into a pure-play general partner, would net the company cash, more of its own units, or cash flowing MLP-type assets. In addition to that it still owns a substantial amount of Sunoco LP's units, which could be sold on the open market or to its own general partner, which would be a better owner of those units. Further, it owns a 33% non-operated interest in a refining joint venture, an entity that owns and operates coal handling facilities, and natural gas marketing and compression operations that could also be sold. Selling or trading these assets would bring in cash that the company can use to fund growth, pay down debt or repurchase its own discounted units.
Fix its midstream operations
Another thing that the company needs to address this year is its midstream segment, which noticeably weakened in the third-quarter. That weakness was due to the company's non fee-based contracts and processing gross margin, which fell from $187 million in the third-quarter of last year to just $67 million last quarter. That's in stark contrast to the fee-based revenue it collected from gathering and processing, which jumped from $352 million to $400 million thanks to new assets being placed into service. What the company needs to do here is to switch more of its contracts to fixed-fee contracts, which would further mute its exposure to commodity price volatility.
Investor takeaway
The downturn in the energy sector really weighed on Energy Transfer Partners last year. If that sector can meaningfully rebound next year, that should take Energy Transfer Partners' unit price up with it. In addition to that the company could help its own cause by completing its transformation to a pure-play MLP and fixing the weak link in its midstream business. If all these factors come together then it's certainly possible that the unit price could more than double and recapture its former glory.
