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Energy Transfer stuck in 'valuation purgatory' almost a year after restructuring

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Energy Transfer stuck in 'valuation purgatory' almost a year after restructuring

Energy Transfer LP may have finally found its M&A "prince," but the pipeline partnership's stagnant stock price reflects corporate governance issues likely to deter new investors despite the company's simplified structure, industry experts said.

Since Energy Transfer Equity LP's $26.55 billion buyout of Energy Transfer Partners LP, the consolidated master limited partnership has beat the S&P Global Market Intelligence quarterly analyst consensus estimates for adjusted EBITDA for four consecutive quarters and posted record earnings while delivering on promises to cut debt. Still, Energy Transfer's stock price has dipped 20.5% since the merger's Oct. 19, 2018, close to settle at just $12.33 per unit on Oct. 9, trading at a heavy discount to top North American pipeline C corporations like Enbridge Inc. and Kinder Morgan Inc. The struggles come as investor apathy toward the energy sector, in general, has significantly reduced fund flows to the midstream space.

"They've largely adhered to what their plan was … but there have been distractions," BMO Capital Markets analyst Danilo Juvane said in an interview, noting the Mariner East family of Appalachian NGL pipelines' environmental slip-ups and Energy Transfer's recently announced acquisition of SemGroup Corp. at a 65% premium. "While it was sort of viewed positively that they focused on capital discipline on the … [second-quarter earnings conference] call in August, the whole SemGroup transaction sort of flew in the face of what they initially messaged."

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Energy Transfer pursued an aggressive acquisition strategy, eventually beating out proposals from about 10 other suitors that included both public and private energy infrastructure companies, because it particularly wanted to acquire SemGroup's Houston Fuel Oil Terminal on the Houston Ship Channel, which has 18.2 million barrels of crude oil storage capacity.

While analysts at UBS told clients in a Sept. 25 note that the transaction moves Energy Transfer's "path to investment grade" credit ratings forward, the planned merger has not screened well with investors.

"This is the exact opposite of investor demands for judicious capital deployment and cash flow harvesting. ... [Energy Transfer] likely remains in valuation purgatory," Robert W. Baird & Co.'s Ethan Bellamy said in an Oct. 8 note to clients.

Energy Transfer CEO and Chairman Kelcy Warren, however, said in an email that the MLP's strategy going forward includes exploring more M&A opportunities even though it "is a difficult hill to climb right now."

Henry Hoffman, a partner at the energy-focused investment firm SL Advisors LLC, criticized that notion. While Hoffman said he believes Energy Transfer's expectation that the SemGroup deal will generate $170 million of annual synergies, he said the departure from a more conservative spending strategy reminds public unit holders of other instances in which management gave the controlling general partner an advantage.

During Energy Transfer Equity's aborted attempt to merge with Williams Cos. Inc. in 2016, for example, ETE issued $1 billion private offering of preferred units to help close the deal merger without affecting its debt ratios. The select buyers of the preferred units would not be able to trade them and would forgo any cash distributions of a certain amount for nine quarters in exchange for a lump sum payout of cash or stock at the end of the period. If ETE cut distributions, the preferred buyers were protected with a future payout, while common unit holders had no protection.

"The extreme greed and abuse of limited partners leaves a bad taste in people's mouths. … It's a stigma that's stuck with them," Hoffman said in an interview. The general partner-limited partner structure works well for hedge funds but is particularly "ripe for abuse" in public companies, he added.

Additionally, there are concerns about the viability of a potential export terminal that would accommodate Very Large Crude Carriers on the Gulf Coast to help satisfy rising international demand for U.S. shale oil. The project has not yet begun the federal permitting process, but it would be the 10th announced project for fully loading Very Large Crude Carriers. Oil industry analysts anticipate that only a few new facilities are needed at most.

"We understand the desire to accompany a producer's barrel of oil from wellhead to water, but given the number of proposed offshore ports we would view this as a form of capital discipline if not built," midstream analysts at Stifel Nicolaus & Co. said in a Sept. 26 note to clients.