In the announced merger between Sunoco Logistics and Energy Transfer Partners, the seeming winner in this transaction is Energy Transfer Equity.
Before market open on Nov. 21, Sunoco Logistics and Energy Transfer Partners
announced a merger agreement wherein SXL will acquire ETP in a unit-for-unit transaction. The conversion rate of 1.5 units of SXL for each ETP unit represents a 10% premium to ETP's weighted-average price for the past 30 trading days. Management expects the deal to be immediately accretive to SXL's distributable cash flow and distribution per unit. The pro forma entity is expected to target near-term distribution growth of low double digits with more than 1.0 times distribution coverage. Existing IDR relief for both SXL and ETP will remain in place. Energy Transfer leadership will take the reigns of the combined entity. And subject to ETP unitholder approval, the transaction is expected to close in the first quarter of 2017.
Stephen Simko, CFA, is director of energy equity research for Morningstar.
Management painted the rationale for the transaction as a way for the Energy Transfer family to more effectively compete and grow in an increasingly competitive midstream environment. The combined entity will have a footprint spanning gas and liquids businesses in the most attractive basins (Permian and Marcellus, in particular) that rivals the largest MLPs in the sector.
We welcome simplification of the ownership structure of the Energy Transfer family of companies. Nevertheless, it is clear investors are concerned about the ultimate beneficiary of this transaction. The investment theses for Sunoco Logistics and Energy Transfer Partners have changed. Sunoco Logistics, previously the growth engine of the Energy Transfer family, is now facing a moderated growth profile and different developmental focus with ETP. ETP sees bigger capital commitments and a potential shift in growth priorities. The seeming winner in this transaction is Energy Transfer Equity, which sees streamlined costs and improved capital availability because its LPs eliminate the need to provide further relief in distribution coverage.
We maintain our fair value estimates at this time.
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