CEQP - Energy Transfer Deal Creates Intriguing Risk/Reward In Crestwood Preferred Units

2023-08-17 05:10:44 ET

Summary

• Energy Transfer is acquiring Crestwood Equity in an all-equity deal with no premium for CEQP unitholders.
• The deal will improve Energy Transfer's credit profile and result in cost synergies of $40 million.
• CEQP unitholders will have a defined increase in annual distributions and the opportunity to participate in Energy Transfer's upside.
• CEQP preferred holders should benefit from lower yields on ET preferreds.

Deal Coming at No Premium:

Energy Transfer ( ET ) announced its acquisition of Crestwood Equity ( CEQP ) in an all-equity deal where CEQP unitholders are receiving 2.07 units of ET for every CEQP unit they hold. That equates to no premium on where CEQP was trading previously and will result in CEQP holders receiving basically the same distribution per unit. The deal is scheduled to close in Q4 of this year. There was a conference call at 9am this morning (August 16th).

This is a great deal for ET and an okay deal for CEQP common unit holders. ET will improve its credit profile slightly even though they say it's credit neutral. Still, at BBB- rating versus BB- for Crestwood, Energy Transfer will likely benefit from lowering the cost of capital at the Crestwood complex. Also, they are guiding to $40 million of run-rate cost synergies (likely from axing CEQP overhead). The deal also gains them some volume on their trunk lines from Crestwood's gathering assets.

CEQP unitholders are not getting any premium, but will now have a defined increase in annual distributions. ET is better positioned to increase distributions whereas CEQP's focus on bringing down leverage and having to refinance the Niobrara JV's preferred shares was holding back distribution growth for the next few quarters at least. The deal is also tax efficient since holders are exchanging partnership units for partnership units, thereby not triggering any taxable event.

By getting ET units, which trade at about the same multiple and distribution yield as CEQP, CEQP holders will participate in ET upside. CEQP CEO Bob Phillips is 68 and had been running CEQP and predecessor companies for over ten years. This deal offers him a graceful exit. I like Bob. I wish him well.

Interesting Opportunity in CEQP Preferred Shares:

I believe the big winners at this point are CEQP bondholders (bonds traded up 3-4 points today) and the CEQP 9.25% preferred ( CEQP.P ) holders (preferreds traded up 4.5%). The preferred units are only callable if the company is bought for cash. If it's acquired for units in another company, the acquiring company has the right to exchange the preferred for a like security, which would mean a preferred of the same ranking, same coupon, same call protection, and even the convertibility feature the option to convert into common at $91.30/unit (obviously way out of the money).

ET preferreds unit have some different features than the CEQP (namely a fix to floating coupon structure if not called). The ET 7.6% preferred ( ET.PE ) trades just south of $25 par and sport a current yield of 7.75%. The ET C preferred ( ET.PC ) just started floating and pays a 10.156% coupon. Since they are currently callable, they trade right around par.

ET's 20-year bonds trade at 6.7%. I think the yield on the ET ( ET.PE ) preferred is the real yield the market is assigning that credit risk. I think if the ET.PC weren't callable at par, they would trade much higher than $25 (much lower yield). Since CEQP 9.25% are not callable, I think it's reasonable to assume that they should trade closer to the ET.PE yield. At $10.50 price on those CEQP preferred ( CEQP.P ) would yield a little over 8%. I think that's a fair price for now improved credit risk. That means you get paid 9% current yield to wait for potential 11% upside with what I believe is limited downside risk.

Risks:

As with any energy security, ET common units and CEQP preferred can be affected by oil prices. The preferred can also be affected by interest rates, although I'll note that the rise in interest rates to current levels largely hasn't affected them to date.

Conclusion:

MLP's mergers are usually done at no premium. I am not excited about this deal as I think CEQP is selling at too low a level, but at least it's taking units in an entity that trades at a low multiple, similarly yield, and has a clearer pathway for growth. Overall, CEQP unitholders should benefit from this deal going forward, perhaps just less than they would have over time had they stayed independent.

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