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Citing 'cash right now,' analysts praise ETP's $1.57B Rover deal with Blackstone

Energy Transfer Partners LP's announced sale of a $1.57 billion stake in Rover Pipeline LLC to funds managed by Blackstone Energy Partners and Blackstone Capital Partners is good financial news for the natural gas pipeline project, which has been beset by regulatory problems and delays, industry analysts said.

"Given ETP's high cost of equity capital ... the asset sale is a better financing alternative than issuing equity," Mizuho Securities USA LLC's Brian Zarahn wrote in a July 31 note to clients. Analysts at Tudor Pickering Holt & Co. agreed that the private equity route will work in Energy Transfer's favor and said the "transaction generates slight accretion vs. previous equity funding approach."

Blackstone agreed to buy a 49.9% interest in ET Rover Pipeline LLC, which owns a 65% interest in Rover Pipeline LLC, meaning the stake to be purchased amounts to 32.44% of the project's ownership. ETP units are building the 3.25-Bcf/d Rover Pipeline project, which would cover 511 miles and move gas from the Marcellus and Utica shale plays to markets in the Midwest and into the Dawn Hub in Ontario.

The transaction, which is expected to close in the fourth quarter, gave Energy Transfer stock a boost. Shares settled at $20.67 on July 31 just before the announcement and then opened at $21.23 on Aug. 1 and climbed to $21.50 as of 2:35 p.m. ET, a 4% gain on the day so far.

Even though private equity generally costs more, Tortoise Capital Advisors LLC Managing Director Rob Thummel said, the access to quick capital from a stake sale is a major advantage. "If you've got private equity, they have the cash right now and it's capital versus going to the public markets ... which also often results in stock price trading down temporarily, so if you have the certainty of private equity, that's helpful," he said in an interview.

On the credit side, Fitch Ratings Senior Director Peter Molica told S&P Global Market Intelligence that the deal is "mildly positive." "It's not enough to move the ratings but it does protect some of the downside," he said.

Since the Federal Energy Regulatory Commission cleared Rover to begin construction in March, the project has accumulated a long list of missteps, including drilling fluid spills and the demolition of a house in Ohio deemed eligible for historical protection, souring Energy Transfer's relationship with the federal agency. Equity analysts recently told S&P Global Market Intelligence that investors are concerned about Rover's regulatory troubles.

Enlisting a big-name institutional investor like Blackstone to help the project gain momentum is another plus for Energy Transfer, Tortoise Capital's Thummel said. Parent company Blackstone Group LP in 2016 was in talks to acquire a $5 billion stake in Energy Transfer assets, but discussions reportedly ended after ETP shares increased, "hurting the economics of the deal."

Blackstone Group has seen recent success in the midstream sector. As the first major backer of the Sabine Pass LNG export terminal, its $1.5 billion investment in a Cheniere Energy Inc.-controlled master limited partnership grew to be worth more than $6.3 billion.