Last year, Energy Transfer Partners (NYSE:ETP) and Williams Companies (NYSE:WMB) made headlines with their will-they-won't-they merger/acquisition/hostile takeover announcements. Recently, the companies have seen their stock prices fall around 40%, which is dragging down a lot of the rest of the Energy Transfer empire with it.
In this segment, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe explain why the stock just tanked, what it means for the empire's plans and projects, and one move Energy Transfer would be wise to consider to fix their debt situation.
A full transcript follows the video.
This podcast was recorded on Jan. 14, 2016.
Sean O'Reilly: Next up, we're talking about the freefall in Energy Transfer and Williams Companies. We are 14 days into the new year, and Williams Partners and Williams Companies are getting hammered, down 40%, and it's even dragging down other parts of the Energy Transfer empire as well. Tyler, cause for concern?
Taylor Muckerman: Bartender needs to cut them off.
O'Reilly: You've had enough!
Tyler Crowe: So a lot of this has to go around the combination/merger/acquisition/whatever the heck you want to call it of Williams Companies and Energy Transfer. Last year, we had that drama around it where Williams said, "Hey, somebody made us an offer to buy, but we turned them down because we think the stock --"
O'Reilly: "We love working with more."
Crowe: And then Energy Transfer said to everybody, "We're the ones that are buying, we think we can make this happen, we're going to tell everybody it's worth it."
O'Reilly: I remember this, it sounded very high school at the time, and it sounds very high school now.
Crowe: Oh, it did. We're talking about hostile takeovers and everything. Now, we've had a couple balls start to roll in the MLP space where Kinder Morgan cut its dividend because a lot of people were getting concerned, "Oh, what if they lose their credit rating," so they had to make that big move to cut their dividends to keep their credit rating intact. Williams Company just recently had its credit rating downgraded by Moody's, from one notch above investment down to just that one notch below into junk territory. Which is, for a large MLP, not very good. Not very good at all. So when you have a non-investment credit rating after having one, and you combine that with Williams Companies, Williams Partners, who has this massive backlog of projects they want to build out, we're talking $30 billion worth of projects --
O'Reilly: That they need to finance.
Crowe: And they need to find some money for it. And, you combine that with the fact that Williams Companies is trying to merge with Energy Transfer, there's a lot of questions as to, could Williams Companies' shakier debt situation roll into Energy Transfer equity and compromise its debt ratings?
O'Reilly: Do you remember any breakup fees or anything?
Crowe: I do not remember if there's any breakup fees related to this one.
O'Reilly: I sort of wonder if everybody's going to be like, "OK, maybe we need to wait a little bit," or something.
Crowe: Whatever happens here -- because, if you look at how much the market is abusing this, you've got both Williams down more than 40%, Energy Transfer equity's down 39%, Energy Transfer Partners is down 23%, Sunoco Logistics Partners down 26%... this is just in 2016 alone. These are big, big moves.
O'Reilly: It's two weeks into the year, man. This is a rough year.
Crowe: The market seems to be pricing in that management is going to do something here. Most likely, somewhere along the way, Williams is going to have a dividend cut, or something along those lines.
O'Reilly: What's their yield right now? You were saying earlier they're asking for the cut.
Crowe: Sorry, I don't have it in front of me right now. But it's in the high double digits.
O'Reilly: OK, I thought you said...
Crowe: Mid-to-high teens for Williams right now. Basically, that shuts off the equity market; they can't raise capital to build there, and with a junk rating, it's going to be more expensive to build. It's just begging for management to make a move, and say something that they're going to do something to shore up the balance sheet or to cut its growth rate, something. But just sitting here and not doing anything...
O'Reilly: There's plenty of precedent to cut that dividend. I mean...
Crowe: Kinder Morgan just did it a month ago.
O'Reilly: Yeah. Plenty of precedent.
Crowe: Teekay Tankers did it a little while ago. Master limited partnerships have, for years, I would say irresponsibly paid out too much money to shareholders in relation to what they've been bringing in. We talked about it with Kinder Morgan. As investors, we pushed for them to give us more cash, and they put themselves to the brink with paying out all that they could.
O'Reilly: I try to get out, and they keep pulling me back in. Little Godfather there, yeah?
Crowe: Well, that's the situation. I'm not surprised.
O'Reilly: Taylor, are you interested in any of these names right now? Doing a little nibbling at all?
Muckerman: Uh... no.
O'Reilly: Cool. Conservatism wins the day.
Muckerman: Maybe add to a couple in the next few months, but right now, my only thought was just to buy an oil-linked ETF and just let it ride.
O'Reilly: Call it a day.
Muckerman: Yeah. Not a producer ETF, just a commodity ETF. And just wait till $60-$80 oil comes back in three to five years.