Events: Situational Update
February 5, 2016
- NYSE: ETE
- Recent PPS: $7.01
- Shares Out: 2,195
- Market Cap: $15,390
- Debt: $16,629
- Enterprise: $32,019
And the penny drops. ETE is out with a beaut after hours: an 8K announcing the replacement of CFO Jamie Welch.
Remarkably, during a distressed high pressure situation it appears nobody within ETE has a clue what is going on right now. What is Kelcy Warren doing?
Not to mention, the WMB board refuses to come to the table to equitize the cash portion of the pending merger.
With a base of natural gas-dominated assets critical to North American energy infrastructure, the pro forma ETE/WMB entity is in incredible long-term position. My thesis was that with the backing of long-term oriented owners in both entities (Kelcy Warren, Soroban, Corvex, Lone Pine), logic would prevail and the pro forma entity would not only survive but thrive thru this distressed operating environment.
Clearly my game theory analyzer is off, as I have no clue who is incentivized to drive these companies into the ground…but that is what appears to be taking place, in a very active manner.
According to the original deal presentation, pro forma ETE will have total debt of $16,629 (including $6,045 of transaction debt) and 2015 EBITDA of $3,502 (distributions – SG&A). Due to actions taken by ETP and WPZ, EBITDA will remain flat in 2016; but according to the November 2015 S4, even in a depressed environment EBITDA rises by almost $2B by 2018.
Assuming the original deal goes thru, at today’s closing price pro forma ETE’s enterprise value is 9.14 times 2015 EBITDA and debt is 4.75 times. Were pro forma ETE to trade for 15-17.5 times EBITDA, the equity would be worth $16.35 to $20.34, and WMB $33 to $39.
If WMB allowed the deal to go thru in all stock, at perhaps a revised ratio of 2.0 times, leverage would fall to 3.02 times. ETE would be worth $16.48 to $19.92, and WMB $33 to $40.
The issue is that at the current trading multiple of 9.14 times, WMB is worth $18.70 under the original terms versus $16.84 at 2.0 times. But that assumes the market is OK with the 4.75 times debt load in this environment…
Why not bring the debt down to 3.02 and take a longer term view of the pro forma entity?
As an ETE shareholder I would be willing to go to even 2.25, which would leave ETE fairly valued at $15.35 at 15 times EV/EBITDA versus $16.48 at 2.0.
The market’s reaction to this news on Monday will be telling. Does ETE grow up and officially address the market in order to stem the flood of selling that is likely to accompany this 8K? Or does Mr. Warren let his net worth continue to spiral into oblivion?
I will note that ETE’s bonds have held up very well into this latest sell-off, creating a positive divergence. The 2027 USN closed today at $67.69 versus the mid-January low of $57.25, yet the stock is whisker away from its intra-day low of $6.63. For reference, last time ETE’s bonds were at this level (late December/early January) its stock was north of $10.
It is an obvious conclusion that ETE will continue to sell off hard on Monday on the news of this 8K. Tough to argue with that. But this is not SUNE, IMHO. There is a LOT of confusion around this situation that I believe is producing an enormous amount of technical selling pressure; not to mention the horrific trading environment that we have been in since the beginning of the year.
I have been dead wrong on this and WMB for months now, so who am I to try to call a bottom. But stepping back from the selling fray amid what appears to be an active effort by ETE and WMB to drive their stock prices down, I believe a LOT of bad news is priced into ETE right now. If the Company was in serious financial trouble – ala LINE, CHK, CRC – its bonds would not be trading at a YTM of 10% per annum. Perhaps this 8K is the final straw and we get one last big dump early Monday…