Please ensure Javascript is enabled for purposes of website accessibility

The Worst Energy Transfer Equity, L.P. Headlines in 2015

By Matthew DiLallo - Jan 12, 2016 at 8:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite a game-changing merger, 2015 was a tough year for the company.

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 (ET 1.57%). 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 (WMB 0.65%) 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.

Investor takeaway
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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
WMB
$34.16 (0.65%) $0.22
Energy Transfer LP Stock Quote
Energy Transfer LP
ET
$11.67 (1.57%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.