Deals

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Things were already pretty festive over at the Energy Transfer group, what with last month's surprise deal bringing the family back together. Now, even as we await the consummation of Sunoco Logistics Partners LP's acquisition of Energy Transfer Partners LP, it appears a prodigal son might make it back in time for the holidays.

Jamie Welch, who was unceremoniously dumped as CFO of Energy Transfer Equity LP back in February and sued the company , has reportedly teamed up with Blackstone Group LP to potentially buy some assets from Energy Transfer Partners, according to The Wall Street Journal. As the Sunoco-Energy Transfer Partners tie-up reiterated, the number one priority for the whole group is paying off debt while mitigating the chances of the parent, Energy Transfer Equity, taking a big hit to its dividends (Chairman Kelcy Warren owns 18 percent of that entity).

Details are scant, so what follows is speculative. But one asset in the sprawling Energy Transfer empire looks particularly well-suited to a deal. 

The news report says Blackstone and Welch are considering buying assets from Energy Transfer Partners. One prominent asset that looks unlikely to be bought is the Dakota Access Pipeline. This already has two strategic partners lined up to buy a stake. Despite the recent delay to completion, it looks like the pipeline will get the go-ahead under the incoming Trump administration. Just a few days ago, Energy Transfer Partners filed an extension to the agreement to sell the stake, resetting the deadline to the end of March.

More broadly, given how the economics and power in the group tilt heavily toward Energy Transfer Equity and Warren (last month's merger being the latest manifestation), Blackstone and Welch might think twice about investing a reported $5 billion or so at the subordinated Energy Transfer Partners level.

The Parent Trip
Energy Transfer Equity has left the two merging partnerships in the dust this year
Source: Bloomberg
Note: Performance indexed to 100.

So here's a suggestion: Maybe Blackstone and Welch should be looking at Energy Transfer's liquefied natural gas business in Lake Charles, Louisiana. This consists of two bits. One is an import facility already up and running. Still, what with that whole shale-boom thing making gas imports somewhat superfluous, this isn't a stunning opportunity. This bit is owned 100 percent by the parent, Energy Transfer Equity.

The other part of the business is a planned LNG export facility next door. This has received regulatory approval, but Energy Transfer, along with partner Royal Dutch Shell Plc, has put off a final investment decision because of the global LNG glut. This project is owned 60 percent by Energy Transfer Equity and 40 percent by Energy Transfer Partners. I've circled both bits at the bottom of this slide from last month's merger presentation:

ete organigram

It's this export project that intrigues me. Right now, it's an option with questionable value; indeed, in a report published by Credit Suisse in August, analysts assigned zero value to it. If it were to go ahead, though, Credit Suisse reckoned it could be worth about $5 per unit of Energy Transfer Equity in 2021. Discount that back at 10 percent a year and adjust for the 60 percent ownership stake, and it implies a present value overall of about $5.4 billion.

Obviously, that's just one sketchy estimate. But the gap between the public market's present indifference to LNG and what it might be worth in a few years is big enough for private equity to drive a train through.

Blackstone noted on its last earnings call that it had become particularly active in energy deals this year. And in this case, it could add value just by showing up.

As Andy Atterbury, President of Bowood Capital Advisors, put it, "having a credible equity capital source materially increases the attraction of the project" from Shell's perspective. He also notes "Blackstone would only be dusting off the file from their Cheniere investment." He's referring to Blackstone's ownership of almost 7 percent of Cheniere Energy Partners LP, which is building another LNG export plant not far away at Sabine Pass, Louisiana.

Plus, of course, if Welch were involved, Blackstone could rely on someone who knows the project -- as well as Warren and the wider Energy Transfer empire --intimately. It's also worth noting that one of Welch's complains in his lawsuit alleged Energy Transfer had reneged on an agreement to grant him an interest in the Lake Charles LNG project.

If Blackstone bought out Energy Transfer Partners' 40 percent stake in the export project, then it would transform a prospect assigned no value into sorely needed cash. It would also make it easier to potentially adjust the overall ownership structure of the Lake Charles LNG assets in order to give Blackstone a cleaner, and more equitable, position alongside Energy Transfer Equity.

And if it also, in the process, brought Warren and Welch back together? Well, maybe that's where a speculative idea just tips into an outright fairy tale. Still, it is Christmas after all.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. A confidential settlement was reached in August 2016, according to Energy Transfer Equity's latest 10-Q filing.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net