ETF Securities Research Blog

All piped up after Trump victory

The first post-election acquisition in the midstream pipeline energy sector was made earlier this week. The deal helps simplify the corporate structure and strengthens the financial health of the company.

Sunoco Logistics Partners LP (SXL) bought Energy Transfer Partners LP (ETP) for $21bn in an all-stock deal on Monday 21 November 2016.The combined partnership is expected to be the second largest master limited partnership (MLP) as measured by enterprise value. This deal untangles the complex structure of five intertwined publicly traded MLPs. It is a timely rescue as ETP’s failed deal with Williams Cos and delays over the controversial Dakota Access oil pipeline (DAOP) pushed the stock lower and threatened its financial well-being. ETP built the DAOP which is expected to carry crude from the Bakken shale field in North Dakota to markets in the Midwest. The pipeline crosses Sioux tribal land and recently sparked fierce protests as the project endangers drinking water and sacred sites. While the deal is unrelated to the controversial DAOP, expectations for less regulation in the energy and infrastructure sector under Trump’s administration raises hopes for approval of the project that was withheld under Obama’s administration, despite meeting all regulatory requirements to build the pipeline.

SXL also stands to benefit from a reduction in distribution pay-outs, which can be used to help strengthen its balance sheet, limit capital market needs and lower its cost of capital thereby enhancing future growth prospects.

sxl-etp-deal-nov-2016

Without this transaction, ETP would have been vulnerable to a distribution reduction, in order to reduce its leverage and strengthen its coverage ratio. While both MLPs prices declined following announcement of the deal, the merged entity will see an estimated $200mn in commercial synergies and cost savings annually by 2019, largely from increased scale and diversification across multiple producing basins.

A trifecta of reasons from pro-energy election results, solid Q3 MLP earnings season and the expected rebalancing of crude oil and gas creates a favourable environment in the midstream energy space and we expect to see a continuation of such deals in the future.