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Energy Transfer Partners Divests Compression Units for $1.8B

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Pipeline operator, Energy Transfer Partners recently agreed to divest its compression units, CDM Resource Management and CDM Environmental & Technical Services LLC, to natural gas compression services provider, USA Compression Partners, LP (USAC - Free Report) for about $1.8 billion.

Transaction Details

Per the deal, USA Compression will pay $1.225 billion in cash along with 19.2 million of its common units and 6.4 million of its Class B units to Energy Transfer Partners. However, there won’t be any quarterly distributions for the Class B units in the first year following the closure of the transaction, which is expected by the first half of 2018.

Moreover, the deal will enable Energy Transfer Equity, L.P. , the parent organization of Energy Transfer Partners, to obtain all equity interests in USA Compression Partners GP, the parent firm of USA Compression. Additionally, Energy Transfer Equity will receive around 12.5 million USA Compression common units for $250 million in cash. The present skilled workers of the divested units are expected to join the acquirer.

Benefits for Energy Transfer

The deal is expected to strengthen Energy Transfer Partners' balance sheet by lowering its debt burden. As of Sep 30, 2017, the partnership had long-term debt (less current maturities) of $33,630 million. Debt-to-capitalization ratio was about 52.2%. Apart from reducing the debt load, the cash proceeds of $1.225 billion can also be used for funding new projects. The move also reduces the chance of the partnership slashing its distribution – currently yielding an attractive 11.3% – in the coming quarters.

What’s in Store for USA Compression?

The deal will significantly enhance USA Compression’s access to the U.S. major basins, especially in Eagle Ford Shale, the Gulf Coast and the Rockies. The divested assets will bring 1.6 million horsepower, thereby increasing USA Compression’s horsepower to 3.4 million. Analysts at Simmons & Co. International believe that compression pricing will increase at a fast pace this year, which will benefit USA Compression in the coming quarters.

About Energy Transfer Partners

Dallas, TX-based Energy Transfer Partners is a master limited partnership (“MLP”) engaged primarily in the gathering, processing, storage and transportation of natural gas and natural gas liquids (“NGL”) through a vast network of pipelines. The partnership has its operations in all the major U.S. production basins.

Energy Transfer Partners has been consistently returning value to its unitholders through distributions, making it attractive for those looking for a steady source of income. The partnership reported a 40.2% year-over-year increase in distributable cash flow in the third quarter of 2017. Further, various key projects like Bakken Pipeline, Rover Pipeline and Permian Express 3 pipeline continue to drive growth.

However, we are concerned about Energy Transfer Partners' high leverage compared to most of its peers, which provides it with little financial flexibility. Moreover, total costs escalated in the third quarter, which put further pressure on the company's liquidity and financials.

We note that Energy Transfer Partners has lost 18.7% in the last year compared with 11.1% decline of its industry.

Zacks Rank and Stock to Consider

Energy Transfer Partners carries a Zacks Rank #3 (Hold).

A better-ranked stock in the oil and energy sector is Cabot Oil & Gas Corporation , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX -based Cabot is an independent energy company. Its sales for the fourth quarter of 2017 are expected to grow 39% year over year. Earnings for the year 2017 are expected to be up 357.14%.

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