Canadians Reward Their Energy Investors

On Thursday Energy Transfer Partners (ETP) released earnings that beat expectations on just about every measure. Midstream infrastructure businesses generally don’t report results too far from consensus – surprises usually come in other ways (more on this below). ETP’s $1.94BN of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was more than 10% ahead of Street estimates. NGL/Products, Midstream, Natural Gas and Crude Oil segments all delivered impressive results.

ETP’s yield has remained frustratingly high for investors and management. At 12%, it reflects substantial investor skepticism about the prospects of its continuation. CEO Kelcy Warren might have felt that Thursday’s results would cause a sharp revaluation higher, whereas ETP managed a muted 4% gain. Its yield remains stubbornly high.

Earlier in the week Warren had testified in Delaware at a civil class action suit against ETP’s General Partner, Energy Transfer Equity (ETE). The plaintiffs contend that a 2016 issuance of convertible preferred securities to 31% of unitholders (ETE senior management) represented an impermissible transfer of value away from investors. We have written about this before (see Will Energy Transfer Act With Integrity?) The offending securities were issued at a time of severe weakness in ETP and ETE stock prices due to the ultimately failed effort to merge with Williams Companies (WMB).

In short, the securities allowed management to reinvest their future dividends at the then current low price, but further protected them from future dividend cuts. A rising stock price would see them reinvesting at an historic, lower level, and if the price fell due to a dividend cut their special dividends would be partially protected.

It looked like an aggressive ploy to force WMB to cancel the deal, since the result was to dilute the value of the merger to WMB investors. But even after the deal collapsed for other reasons (a revised tax opinion that conveniently rendered it unworkable), the new securities remained. Kelcy’s ill-advised pursuit of WMB justified issuing special securities with the stock price at its low, and he wanted to keep them.