Energy Transfer Equity LP (NYSE: ETE) slashed expectations for its more than $14 billion takeover of rival pipeline company Williams Cos. Inc. (NYSE: WMB) on March 23, saying cost savings could be all but wiped out by low oil prices and higher capital costs.
Energy Transfer said, in a filing with the Securities and Exchange Commission, it now expects the base case for EBITDA from commercial synergies from the deal to be about $170 million a year by 2020, compared with previous forecasts of more than $2 billion.
Those cost savings forecasts were based on the assumption that oil prices will be between $32.92 to $44.31 per barrel in 2020.
Energy Transfer's assumptions of crude oil prices is based on futures contracts as of Jan. 20, when cash oil prices hit a 12-year low of $26.19 a barrel and prices of oil for delivery in 2020 were just above $43, a record low.
The cash price for oil is currently around $39.50 while futures for delivery in four years time are just under $50 a barrel.
If there is a better oil price recovery, with prices ranging between $53.97 and $64.26 per barrel of oil in 2020, Energy Transfer said EBITDA from commercial synergies could be around $590 million a year. That would still be significantly below previously forecast levels.
Dallas billionaire and Energy Transfer Chief Executive Kelcy Warren's ambitions to buy rival Williams has been beset with problems, and the shares of both companies have been battered by the sharp drop in energy prices.
Williams said it is still committed to closing the deal.
"Williams believes the transaction with ETE is in the best interests of stockholders and intends to consummate the transaction following receipt of stockholder approval," the company said in a statement.
In addition to the lower cost savings, Energy Transfer said in the filing it plans to grant awards under a long-term incentive plan that will dilute Williams stock holders position in Energy Transfer Corp., the vehicle Energy Transfer Equity is launching to buy Williams. It also said that it would likely need to reduce its presence in Williams' home state of Oklahoma significantly.
Energy Transfer Equity had about $7 billion of debt at the end of last year. To carry out the deal, it will take on an additional $6.05 billion in debt to finance the cash portion of the purchase and will assume about $4.2 billion of Williams' outstanding debt.
The company also said that, after the Williams deal closes, it plans to grant awards under an incentive plan for employees, consultants and directors of the company covering about 10% of the outstanding common shares of Energy Transfer Corp.
If the grants take place, Williams Shareholders would hold about 74% of the outstanding Energy Transfer Corp. shares, down from about 81% before the grant. Energy Transfer Equity shareholders would hold about 17% of the new vehicle's shares, down from about 19%, the company said.
Energy Transfer said that in order to reduce expenses further it would need to consolidate both companies headquarters into its home base of Dallas. It said Williams presence in Oklahoma will therefore need to be "significantly reduced."
Shares of Williams closed down $1.37, or 7.8%, at $16.26 on March 23. Energy Transfer Equity units closed down 52 cents, or 6.8%, at $7.15.
RELATED: Energy Transfer Partners’ Long Pursuit Of Williams Ends With $38 Billion Ring
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