With prices and demand for natural gas slumping, Energy Transfer Partners LP (NYSE: ETP) knew it had to make a transformational move.
And on Monday, the biggest natural gas transporter in the country did just that – snapping up the iconic Sunoco, Inc. (NYSE: SUN) for $5.3 billion.
This is the third time in the past 13 months that ETP has absorbed a competitor.
In December, parent partnership, Energy Transfer Equity (NYSE: ETE), closed a $3.7 billion deal for Southern Union Group. Prior to that, ETP and its affiliate, Regency Energy Partners LP (NYSE: RGP), agreed to buy LDH Energy Asset Holding LLC for $1.93 billion.
However, this may be ETP’s shrewdest move yet.
The Dallas-based pipeline operator said it would pay Sunoco investors either $50 per share in cash, 1.0490 ETP shares, or a combination of $25 per share and 0.5245 ETP shares. That’s a 23% premium to where Sunoco’s stock closed Friday.
That makes the deal relatively cheap for ETP, since the average premium of 97 deals in the North American pipeline sector over the past 12 months was 48%, according to Bloomberg data.
Sunoco isn’t just a pipeline company, either – it’s one of the largest gasoline distributors in the United States. The company operates gas stations, oil terminals and, until recently, refineries.
Sunoco announced its plans to exit the refinery business – which it took up in 1895 – last September after rising input costs and slackening demand pinched profit margins. The company said it’d lost $1 billion on refineries over the last three years.
Sunoco, the second-largest independent refiner by capacity behind Valero Energy Corp. (NYSE: VLO), shuttered its Marcus Hook refinery in 2011. Earlier this month, the company launched exclusive negotiations with Carlyle Group to potentially form a joint venture that would transfer operations of its Philadelphia refinery to the private equity firm.
Sunoco is just one of many energy companies torpedoed by the cyclical refining business.
Across the United States, refineries are being shuttered and sold – driven to closure by high oil prices and shrinking demand for gasoline. Roughly 1.5 million barrels of daily refining capacity have disappeared in just the past few years.
Now, with small refiners drowning and large, integrated oil majors shedding refining assets in an effort to stay afloat, the scavengers are looking to salvage what they can from the defeated.
Energy Transfer Partners saw the opportunity to diversify its operations.
As part of the deal, the company will take control of 4,900 Sunoco gas stations. The retail outlets sell five billion gallons of gasoline and diesel fuel a year, along with another $500 million a year in merchandise sales, but they were by no means the main focus of the acquisition.
The real score for ETP was 8,000 miles of pipeline, which will give the company the ability to move crude oil and refined petroleum products from the Great Lakes and Northeast to America’s refining cluster along the Gulf Coast.
ETP has been on a mission to transition from a regional natural gas pipeline operator to a point man for crude and petrochemicals, as well as natural gas.
“We needed to be more involved in the movement of crude,” said ETP Chairman, CEO and Cofounder, Kelcy Warren.
Warren said as early as 2009 that ETP would make a “transformational” deal to insulate itself from natural gas, which has since fallen to historic lows.
After this deal closes, 70% of ETP’s cash flow will come from transporting gas and 30% from liquids.
Additionally, the Sunoco deal, which is expected to close by the fourth quarter, will bring $70 million in annual cost savings and immediately add to earnings.
That’s good news for a stock that slipped last year but is now on its way back up.
Higher than normal winter temperatures dented demand for natural gas, which was already oversupplied. ETP stock slumped about 8% last year as a result. However, it’s since rebounded, rising 9% so far this year.
Better still, since ETP is a master limited partnership (MLP), it has an inordinately high dividend. The company has grown its distribution payouts by more than 10 times since its first quarterly payment in May 2006, and currently yields 7.17%.
So if you’re looking for an investment that has large upside growth potential and a juicy dividend yield, you won’t do much better than ETP.