ET - Energy Transfer Preferred: This One Goes To 11

2024-01-11 17:35:04 ET

Summary

• Energy Transfer LP issued a new 8% junior subordinated paper, trading up 2 points and yielding 7.71%.
• Energy Transfer 9.25% preferred shares still have an upside, potentially trading at a premium due to the lack of call feature.
• Risks include potential profit-taking, poor performance in the energy sector, and the possibility of Energy Transfer attempting to call the paper.

New Issue Update:

Energy Transfer LP ( ET ) issued a new 8% junior subordinated paper yesterday (January 10th). The paper is pari passu with the old CEQP 9.25% preferred that has become ET 9.25%, Energy Transfer LP 9.250% FXD PFD I ( ET.PR.I ) post the company's purchase of Crestwood . The new 8% issue traded up 2 points and is yielding 7.71%. It is callable at par (100) in 2029.

Even with the pop, I continue to view the ET.PR.I preferred to have an upside. They are worth $11 just to get to the yield on the new paper. The lack of a call feature means they could trade at a premium.

There was considerable consternation over this paper at the time of the merger between Crestwood and Energy Transfer. As I wrote , I thought that the merger would be a net positive for the 9.25% and that people should take the consent payment. People feared that the consent requested to make require only a majority of holders (rather than two-thirds) meant that Energy Transfer was going to screw them out of their paper. I thought that was silly and the action on the paper since has proven out.

Risks:

I wouldn't blame people for taking profits on the paper now that it is above $10. High yield and preferred shares have rallied with the overall interest rate market. If you are concerned that interest rates or high yield spreads are headed higher, this paper is not for you.

There is also the risk that energy writ large trades poorly because of weaker oil and gas prices. Any name in the space could trade poorly as a result regardless of where it is in the capital stack.

That said, Energy Transfer's credit continues to improve its credit profile. As that improves, the credit spreads on its bonds and on this paper should tighten.

There is also the risk that ET attempts to get a change to be able to call this paper and gets the majority votes to do so. I would be shocked if people gave that consent without fair compensation, but stranger things have happened.

Conclusion:

Keeping this short since I have covered this security ad nauseam, this is a nice yield paper that has an upside in order to match the yields on ET's other preferred paper. I think the fears around the consent have been disproven. You won't get rich owning this paper, but it is a rare-fixed income security with a clear pricing upside independent of an interest rate move.

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