How might the settlement impact the valuation of Energy Transfer's common units and the current market price?
Impact of the settlement on Energy Transfer (ET) common units
The proposed class‑action settlement means that anyone who bought ET’s common units during the February 25 2017‑to‑present window could be eligible for a cash payment. From a fundamental standpoint the most immediate effect is a cash outflow from the partnership that will be distributed to a potentially large pool of claimants. Because the settlement is being funded out of ET’s cash balance (rather than by issuing new equity), the partnership’s net asset value (NAV) per unit will be reduced by the amount of the payout. In the short run this creates a downward pressure on the market price as the market anticipates a lower NAV and a dilution of the cash‑cover for the units’ dividend yield.
On the price‑action side, the market typically reacts with a sell‑off when a cash‑based settlement is announced, especially for a partnership whose units trade close to NAV. ET has been holding a relatively tight premium/discount to NAV in recent weeks, and the settlement will likely push the discount wider. Expect the price to test the $1.00–$1.05 support zone (the lower end of the recent 20‑day moving‑average band) with increased volume as investors unwind positions or hedge exposure.
Trading implications
- Short‑term: A modest‑to‑moderate downside bias is reasonable for the next 2‑4 weeks as the market prices in the cash outflow and the widened discount. A short‑term sell‑or‑reduce position at current levels (≈$1.10–$1.12) could capture the anticipated dip, especially if the price breaks below $1.00 on heavy volume.
- Medium‑term: Once the settlement is executed and the cash distribution is completed, the legal tail‑risk is removed. If the discount does not widen dramatically, the unit’s yield (ET’s cash‑flow‑generating model) will look more attractive relative to peers, providing a floor for the price. A buy‑on‑dip at the $0.95–$1.00 range could position a trader for a rebound toward the $1.20–$1.25 level, where the unit historically finds support near its 50‑day moving average.
Actionable take‑away: Anticipate a short‑term price correction (‑3‑5 %) as the settlement is priced in; consider a tactical short or partial profit‑take now, but keep a modest long‑position or set a buy‑limit order near $0.95‑$1.00 to capture the post‑settlement recovery and the restored cash‑flow premium.