Is Energy Transfer's Acquisition a Game Changer?

Joseph Cioffi |

Monday we had big merger news in the MLP space as Energy Transfer Partners (ETP) announced that it will be buying Sunoco (SUN), making it the most diversified MLP (their words) out there. Certainly, the move puts Energy Transfer Partners in areas where some other MLPs have already moved into. The chart of ETP has not exactly been something to write home about, but given the companies' issues with distribution growth, it really hasn’t behaved too badly.

Energy Transfer Partners ETP(Click to enlarge)

The important development here is that by purchasing Sunoco, Energy Transfer may be in a position to resume distribution increases on a quarter-to-quarter basis. This, and the move in to natural gas liquids, which is where the growth is, takes Energy Transfer Partners back to the very top of its range. It could be poised for a breakout above this, which means that we could be at the beginning of a nice longer-term uptrend. Look at Plains All American (PAA) for what happens to an MLP when it gets into the nat gas liquids business.

Plains All American Pipeline PAA(Click to enlarge)

Plains was going sideways through much of 2011 and then you see that huge jump from $55 to almost $85, which came when the company made its nat gas liquids announcement. In the end, its about distribution growth and clearly the market is saying here that distribution growth quarter-to-quarter will continue. Watch the $51 level on Energy Transfer because a break above that could be a signal that this MLP is about to come alive again after being in the doldrums relative to other MLPs.

Speaking of doldrums, one MLP, which has yet to get back to its all-time high or even its 52 week high, is Nustar (NS). Nustar runs Valero gas stations and even with high gas prices, it is not the business you want to be in right now. In fact, traders were not happy with its earnings report last week, which showed a distributable cash flow of $0.60. The company is only taking in half of what it is paying out. Now to be fair, Nustar typically makes it up in the second half so that by year-end we have a payout ratio of over 1, which you need for a sustainable distribution. But this fact and the lack of any distribution growth coming gave sellers the upper hand and the stock is hovering around $55.

NuStar Energy NS(Click to enlarge)

This MLP has risk to it. The company says business is good and the outlook is good. But there can’t be much upside here as long as the distribution is not increasing. In then end, for MLP investors, distribution growth is what it's all about. This chart is not signaling a payout growth of any kind, at least for now.

Just a side note here. The mlp index is nearing 400 again and is now 2.5 percent below its all-time high of 410. The index has been moving sideways since January and it seems now that the markets are taking the group back up with it to the top of the range. Watch what happens if we get back to 410. Will it be breakout or fakeout?

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
NS NuStar Energy LP 47.61 -0.76 -1.57 296,205
OZM Och-Ziff Capital Management Group LLC Class A Shar 3.32 -0.16 -4.60 579,610
PAA Plains All American Pipeline L.P. 32.45 -0.19 -0.58 2,116,560
SUN Sunoco LP representing limited partner interests 29.32 0.27 0.93 467,015


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