Last year was really tough on energy companies, with the continued weakness in commodity prices driving concerns about the viability of energy company business models. Those concerns led to a number of pretty bad headlines for Energy Transfer Equity (NYSE:ETE). Here's a look back at some of the worst headlines investors had to read last year.
1. "Investors Balk at Energy Transfer's $34bn Merger With Williams" -- Financial Times
After initially rebuffing Energy Transfer Equity's overtures, Williams Companies (NYSE:WMB) finally agreed to a merger deal in late September. Investors, however, were underwhelmed because the deal valued Williams at just $43.50 per share, which was down from the $64 per share that Energy Transfer initially offered. This much lower valuation, which came after energy prices resumed their decent, suggested that industry conditions were much tougher than investors thought and that the timing of the Williams deal might not be ideal.
2. "Why Everything Energy Transfer Plunged Double Digits in November" -- The Motley Fool
Shares of Energy Transfer continued to fall after the Williams deal was announced. That slide was due not just to investors' general concerns with the sector, but more specificity to concerns with Energy Transfer Equity's namesake MLP Energy Transfer Partners' (NYSE:ETP) third-quarter results, which were stung by commodity price volatility. This was after Energy Transfer Partners' distributable cash flow slid 14.9% on an absolute basis and 62.3% on a per-unit basis after weak commodity prices cut into the margin it received for its percent-of-proceeds contracts as well as the result of commodity-price-related productions shut-ins.
This weakness led to a very concerning distribution coverage ratio of 0.84, which means that the company is paying out more than its earning. That weakness is fueling concerns that its distribution could be cut, which would affect the cash flow received at the Energy Transfer Equity level given that a large portion of its income is either common unit distributions or incentive distribution rights received from Energy Transfer Partners.
3. "Debt Analysis: Is Energy Transfer Equity in Dire Straits?" -- Seeking Alpha
One of the big concerns with weak commodity prices is the impact those prices are having on the cash flow of energy companies, which will make it harder for them to manage their lofty debt levels. These credit worries have led to a trickle-down effect within the industry, with investors growing worried about companies with high leverage ratios.
According to Energy Transfer Equity's management team, the leverage ratio of its operating companies is 4.5, which is on the high side for MLPs. Worse yet, its leverage has been heading higher and will continue to grow after closing its deal for Williams Companies because it had to offer a cash payout to seal that deal. This growing leverage during a time when leverage is negatively weighing on the energy sector has really weighed on the company's unit price over the past few months. It's a concern that could continue to grow should commodity prices grow weaker, especially if that causes a bankruptcy wave to hit the sector.
Energy Transfer Equity had to endure some tough headlines last year. These headlines point out that the company is facing an uphill battle to not only convince investors that its deal for Williams was the right deal for it to make, but that its debt is manageable. These concerns really stem from the company's exposure to commodity prices, which has the potential to affect its cash flow. Until those commodity prices finally stabilize, there could be quite a few more bad headlines on the horizon.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.