The company that owns Sunoco, Energy Transfer (ticker symbol ET), is looking at a future that is a lot less promising than the past 10 years have been. This is a result of both short-term factors (overbuilt pipelines, contract expirations), and long-term factors (declining oil and gas demand, increasing regulation of pollution and greenhouse emissions). The company tried to put the best face on the situation in its quarterly analyst briefing on the evening of February 20, but ET share prices slid when the market opened the following day.
I find it useful to sit in on these quarterly calls, which anyone can do by visiting the “Investor” section of the ET website. Little was said about the Dragonpipe (Mariner East pipeline system) on this particular call, but there were a few tidbits. The “completion of the next phase of the project” (which I take to be ME2X, based on what has been stated in previous calls) has been pushed back to “late 2020”, and completion of the “final phase” (the original “ME2”, a 20-inch pipeline across the whole state) has been pushed back to “the first quarter of 2021”. The company emphasized that “we were pleased to reach an agreement with the DEP that will allow us to complete the construction projects we have underway in Pennsylvania.” That statement conveniently ignores various permits not yet obtained, cases before the PUC, and lawsuits that are still in the courts.
One of the analysts on the call, Michael Lapides of Goldman Sachs, tried to get ET to provide an estimate of how much additional revenue would be generated by completing ME2X. Mackie McCrea, ET’s President, dodged the question, saying: “I think right now we won’t get into those details to that degree… We are very optimistic that by the end of the year if not earlier, the next significant phase of Mariner will be completed…. Once we complete Mariner, … we’ll see a substantial increase in revenue.” I was left with the impression that McCrea was not very confident about the completion dates. In fact, in call after call, ET has postponed the completion dates. The project is now at least 3 years behind schedule—perhaps more, depending on how you calculate.
ET’s description of its financial future was less rosy than investors had hoped. After the call, online comments in investor forums described their disappointments. “I think the takeaway from the call is that ET and the entire industry have overbuilt pipeline capacity and it’s coming home to roost,” wrote one. Others worried about ET’s pipeline contracts that were ending, with customers being re-signed at lower rates than they currently pay. The company was also vague on its approach to reducing debt to levels it had promised to the rating agencies. ET, as an investment, has lost its luster.
ET stock lost over 3% the day after the call.
You can listen to a recording of the call (about 50 minutes) or read the transcript here.