When we finally got to the eponymous part of the day, the format switched a bit. For Energy Transfer Partners (ETP), rather than having different members of management present various sections, the majority of the presentation was handled in a panel discussion style. On the one hand, that’s pretty cool because now I have double information (slides + transcript), but on the other hand, there were times when the conversation felt overly scripted, giving the dialogue a stilted feel.
Still, there were some pretty great quotes.
“Yabba Dabba Doo!” – Kelcy Warren on Energy Transfer.
“Bamm Bamm Bamm” – Steve Spaulding on Lone Star.
But let’s back up and provide some history. The team at Alerian has been going to the Energy Transfer Analyst Day for years. They used to predominantly be a Texas intrastate natural gas pipeline company. But Kelcy Warren is a firm believer that a company shouldn’t grow by organic growth alone. So, in 2011, ETP and affiliate Regency Energy Partners (RGP) acquired Louis Dreyfus Highbridge Energy, launching the Lone Star NGL joint venture. In 2012, ETP acquired Sunoco Inc, a Philadelphia-based refiner and marketer that owned the GP, IDRs, and 32% of the LP interests in Sunoco Logistics Partners (SXL), expanding into crude and refined products. Also that year, ETP began building fractionators in Mont Belvieu.
Prior to the third quarter of 2013, ETP had gone 20 straight quarters, or five years, without raising its distribution. As of this past quarter, thanks to diversification through acquisitions, ETP grew its run-rate distribution by 7.7% year over year. Investors have returned to the stock in droves over the last 18 months, resulting in 42% total return versus 10% for the Alerian MLP Index (AMZ) over the same period. ETP is targeting mid-to-high single digit distribution growth over the long term.
Throughout this period of growth, ETP has focused on increasing the percentage of its business that is fee-based.
On the macro front, Energy Transfer tried to address concerns about the potential for lower volumes flowing through its G&P assets from falling oil prices by including a slide with the breakeven economics in various basins. As producers in the highest-cost basins lay down rigs in response to the commodity environment, those that are still producing benefit from a supply/demand imbalance in the oilfield services market and the lower production costs that result. But with WTI trading in the $40s and natural gas nowhere near $4/MMBtu, a slide that was meant to be comforting to investors now looks more concerning two months later.
Another macro concern that we frequently address at Alerian is what MLPs will do with underutilized pipelines, if and when long-term contracts roll off. As you can see below, with the development of the Marcellus, there is diminished need for natural gas to be brought to the Northeast from other parts of the US. Instead, pipeline capacity can be used to bring natural gas from the Northeast to export facilities on the Gulf or further into Mexico. Several of ETP’s pipelines still have many years left on their contracts, but management is already looking for opportunities should shippers not wish to recontract.
Of increasing interest to investors is what role MLPs will play in the privatization of the Mexican energy industry. According to ETP, Mexican power plants, which see one third of their operating expenses come from fuel, are very interested in converting from diesel to natural gas, given the cost advantages. New natural gas power plants will also be built, requiring infrastructure projects on both the US and Mexican side of the border. Here’s what ETP already has on the drawing board.
ETP obviously has plenty of growth opportunities to finance over the near and medium term. Instead of issuing more of its own units, ETP may utilize one or more of its “additional levers,” i.e. ownership interests in other MLPs, which management believes are not fully reflected in the current unit price.
How are all of these companies related? Now’s probably a good time to bring back the Energy Transfer family tree, as well as an overview of each affiliate.
And because it’s possible that the only thing you’re thinking about right now as it relates to your MLP investment is commodity prices, here’s my favorite slide in the whole deck. (It gets pretty small. You might have better luck downloading the data here. It’s slide 34.)