Brent Humphreys/Bloomberg Markets
The price of oil was $106.50 a barrel when Dallas-based Energy Transfer Partners announced plans last June to build a 1,134-mile pipeline that would pump crude from North Dakota’s Bakken shale through an Illinois terminal to the Gulf Coast.
The price had dropped to $69 when the 100 Grannies activist group protested the pipeline at a Dec. 1 meeting in Fort Madison, Iowa. By March 12, when a coalition of South Dakota business and labor interests declared support for the project, oil was at $47.05 and still hadn’t hit bottom.
Nobody was happier about the crash than Energy Transfer Chairman and CEO Kelcy Warren, Bloomberg Markets magazine reports in its June issue. “We got so lucky,” he says, flashing a giddy smile during an interview in his capacious Dallas office. “All of our competition vaporized.”
Enterprise Products Partners, a giant rival of Energy Transfer, shelved plans to build its own Bakken line as producers grew skittish about future drilling and shied away from commitments to pay for more pipeline capacity. Warren stabs a finger at North Dakota on a U.S. map. “I don’t think there’s ever going to be another pipeline built to the Gulf Coast out of there,” he says. Unless the star-crossed Keystone XL pipeline wins approval, “we’re all by ourselves.”
Warren, a solidly built 59-year-old with a head of cottony white hair, is among America’s new shale tycoons who’ve amassed fortunes by tapping gas and oil deposits in dense rock that’s being cracked open by horizontal drilling and hydraulic fracturing. His company does no divining or drilling. Rather, it takes the stuff others pull from underground and moves it from one place to another, chilling, boiling, pressurizing, and processing it until it’s worth more than when it burst from the wellhead.
The fracking revolution that has generated a glut of oil and gas has been a boon for Warren and his cohorts in the pipeline industry. They’re remapping America’s 2.5 million-mile (4 million-kilometer) pipeline network, reversing the historical south-to-north flow that carried crude imports and refinery products away from the Gulf Coast. Oil gushing out of North Dakota and gas flowing from Ohio and Pennsylvania have created new and more-complex transportation needs.
More than 40 pipeline projects are in the works in Ohio’s Utica and Pennsylvania’s Marcellus fields alone, says Rick Smead, who specializes in natural gas markets at Houston-based RBN Energy. The U.S. could need more than $600 billion in new oil and gas infrastructure by 2035, the industry-funded Interstate Natural Gas Association of America Foundation estimates.
Some pipeline companies are feeling pain, thanks to the oil bust. A Standard & Poor’s pipeline industry index fell 18 percent from July, when oil prices started to plunge, through mid-March, before it began to recover. A prolonged shale bust could begin to test Energy Transfer, not just its rivals. If oil prices stay low, Smead says, demand for new infrastructure will tail off. A growth slowdown that curtails investment could start a vicious cycle, he says. Partnerships like Energy Transfer need to be careful where they invest—and need to not run out of places to invest.
With acquisitions and construction projects, Energy Transfer now has 71,000 miles of pipeline.
Courtesy of Energy Transfer Partners
The Bloomberg Billionaires Index estimates Warren’s net worth at $7.3 billion. The polished mahogany desk in his office is draped with maps of bountiful natural gas and oil fields that Energy Transfer now serves after a five-year, $40 billion acquisition binge. Across the room stands a chrome sculpture of a 42-inches-in-diameter circle meant to signify a pipeline. It celebrates a risky but lucrative decision Warren made to build an unusually large connector pipeline from his home state’s Barnett field, America’s first major shale play, to Louisiana.
He lives in north Dallas with his third wife, Amy, 50, in a 23,000-square-foot (2,100-square-meter) home on 10 acres in the pricey Preston Hollow neighborhood, where one house was for sale in April for $33 million. Warren’s six-bedroom, 13-bathroom home has a chip-and-putt green, a pole-vault pit, a four-lane bowling alley, and a 200-seat theater where the billionaire’s musician pals play private concerts. A polished 12-foot section of an oak tree gives his 12-year-old son Klyde’s bedroom the feel of a treehouse. “Isn’t that cool?” Warren asks as he shows a visitor around.
Giraffes, javelinas, and a hulking, ill-tempered species of Asian oxen called a gaur roam Warren’s 11,000-acre ranch northwest of Austin. He also has ranches in eastern Texas and southwest Colorado, a house on Lake Tahoe, and an island off the coast of Honduras.
He donated millions of dollars (he declines to say how many) to have a Dallas park named for Klyde. He indulged his passion for music by co-founding a label called Music Road Records.
Five years ago, Energy Transfer was a little-known family of partnerships with about $6 billion in revenue and pipelines that moved nothing but gas almost entirely within Texas. Today, it’s a 71,000-mile oil-and-gas transportation-and-processing web that spans the country and exports worldwide.
“To be where we are today, it’s like a dream,” Warren says. “I swear to God, I almost think we did it without anybody noticing.”
Now, he’s in jeans and a white Energy Transfer polo, heading for a quick visit to his Austin recording studio. Joining him are Energy Transfer colleagues Matt Ramsey and Cliff Harris. They love to needle him about his houses and planes and how his hip replacement last year helped his golf game (or not). As the Falcon exits Dallas airspace, they shut up long enough for their friend to tell some of his story.
He grew up middle class in little White Oak, Texas, about 120 miles east of Dallas, population 1,903 when he lived there. His father worked in the oil fields and urged his son to get an education so he wouldn’t have to do the same.
Young Kelcy flunked out of the University of Texas at Arlington after a year of partying and went home to work for his dad’s employer, Sun Pipeline. He attended night classes while toiling on a pipeline under construction nearby. “That was hot, dirty work,” Warren recalls. “I really grew up.”
He returned to UT, earned an engineering degree in 1978, and took a $1,333-a-month job designing pipelines for Lone Star Gas in Dallas. “I thought I was rich,” he says. He moved to Odessa, Texas, to learn the commercial side of the business and then back to Dallas to work for another pipeline outfit, Endevco.
Endevco got into financial trouble after an ill-advised purchase of a refinery, paving the way for Warren’s first stab at profiting from a problem. In 1993, he and a well-heeled friend, Ray Davis, now co-owner of the Texas Rangers baseball club, bought Endevco out of bankruptcy. When they sold it two years later, Warren made $13 million. “It was more money than I’d ever dreamed of seeing,” he says. “So I chucked it all in the middle of the table, and so did Ray Davis, and we started Energy Transfer.”
Courtesy of Energy Transfer Partners
Courtesy of Energy Transfer Partners
Pipeline companies make money by charging fees set in long-term contracts for moving molecules from point A to point B. They also can profit on spreads between spot market prices at different junctures. Increasingly, they’re also adding value to gas as it moves by using heat, cold, and pressure to fractionate dry gas into propane and other liquids in heavy demand in the U.S. and abroad.
Successful operators keep construction and maintenance costs low and their pipelines full from the minute they start pumping. While these companies aren’t totally insulated from swings in commodities prices, they’re better off than most, especially if they spread the risk over a diverse array of businesses.
Some of what the young Energy Transfer bought included pipes tapping the Barnett shale around Fort Worth—at a time when production there was beginning to climb. “We made a very ballsy move,” Warren says. Thinking he could funnel gas nationwide, he ordered up a 42-inch pipeline from the Barnett to East Texas and then on to Louisiana.
It was one of the first pipelines with a diameter that big in the U.S. Few pipe mills could supply the raw materials, and few construction companies had the requisite skills, making the fat conduit costlier than more-traditional pipe. But Warren’s sales team got contracts with the producers who would use the line, assuring it would be full—and profitable. Energy Transfer gave customers commemorative sculptures like the one in Warren’s office.
The willingness to take risk where others might not was typical of Warren, says Harris, a former Dallas Cowboys All-Pro safety who’s now director of a gas technology company owned by Energy Transfer. “At the same time, it’s expected that the people who work for him are going to fill that pipeline up,” Harris says.
Despite its appeal to investors, growth isn’t a goal in and of itself, Warren says. “Our strategy always has been about creating a more efficient hydraulic machine,” he says. The pipes and other pieces of the system have to work well together, transporting the right products to the right hubs, ports, and processing facilities. The machine, as of 2010, was getting almost all of its revenue from gas in Texas. Making money was becoming tougher because shale production up north had created a glut that cut prices. Warren decided he needed a bigger and more diverse network.
On a Friday evening in March 2011, Warren had come to relax with Amy and Klyde at his ranch near Palestine, Texas, after losing a bid to buy a trove of pipelines and other properties from Louis Dreyfus Highbridge Energy. The lake there shimmered beneath a flawless sky as he nursed his disappointment over missing out on a chance to expand his gas liquids business, where margins can be much larger than for pure gas.
He and Klyde were about to take a spin on ATVs when Warren’s mobile phone rang. He took the call on the lakeside deck, where cell coverage was good. An investment banker told him Energy Transfer could win the Dreyfus deal if Warren could stomach a higher price and other conditions. Within 90 minutes, he’d gotten his board of directors, all by phone, to give a go-ahead on what would be a $2 billion acquisition.
The Dreyfus purchase touched off a string of dealmaking that made Wall Street nervous. Next, Energy Transfer won a bidding war with Williams Partners to acquire Southern Union for $8.5 billion. Southern Union brought 20,000 miles of pipelines stretching into Florida and Michigan as well as a liquefied natural gas facility in Lake Charles, Louisiana, that Warren saw as a potential export gold mine.
The deal had barely closed when he learned that venerable Sunoco, operator of 4,900 gas stations and a vast Texas shipping terminal—the company where his father worked for more than 40 years—was available.
It seemed a stretch for Energy Transfer. “We were not in gas stations and peanuts and Slurpees,” Warren says. Worse, “we were getting a reputation as deal junkies. We had critics saying anybody can grow if they just keep buying things.”
Again Warren turned to his board. The directors saw a good fit, he recalls. “They said: ‘Kelcy, what are we missing? Why wouldn’t we do that?’” He sent deputies to New York to calm the ratings firms. Sunoco went to Energy Transfer for $8.7 billion.
Even as Energy Transfer Partners has added debt, it has kept its rating at the lowest investment-grade level. Both Moody’s Investors Service and S&P say the outlook for the debt rating is stable.
More deals were to come, including January’s $18 billion pact to merge with Dallas-based Regency Energy Partners. But it was Dreyfus, Southern Union, and Sunoco that gave Energy Transfer the financial and geographic heft to vie with the likes of Enterprise Products Partners and Kinder Morgan, the largest U.S. pipeline company and source of Chairman Richard Kinder’s $12.4 billion fortune.
Warren says the pieces of his hydraulic machine are working well together. Today, the company is converting an old Southern Union gas pipeline to carry Bakken crude from Illinois to the Sunoco terminal in Nederland, Texas. Ships that tie up at one of the five Nederland docks recently started loading propane funneled from a fractionation plant on a site once owned by Dreyfus in Mont Belvieu, Texas. The propane is moving all over the world.
“When they make an acquisition, they’ve got an ability to see something associated with that acquisition nobody else sees,” says Brian Kessens, managing director at Tortoise Capital Advisors, one of the biggest unitholders in Energy Transfer and related entities.
The counterpoint is that the complexity of Warren’s empire might eventually catch up with him, says senior analyst Ethan Bellamy of Robert W. Baird & Co. “There’s a danger that there’s so many moving parts that it’s hard for anyone to keep their finger on it all.”
Energy Transfer Partners is one of four master limited partnerships over which Warren has effective control. MLPs, used primarily by energy companies, don’t pay income taxes. Instead, investors holding units—the rough equivalent of shares—pay taxes on the quarterly cash distributions they receive.
That gives MLPs a lower cost of capital for acquisitions and construction projects. But they have to crank out those cash payments to keep unitholders happy, which means they must keep acquiring new properties or expanding existing ones. “You must grow until you die,” Warren says. He touched on the topic during Energy Transfer’s quarterly earnings conference call earlier this month. He said he was “a little frustrated right now” because he had expected that cheap oil and narrow natural gas processing margins would have created more takeover bargains.
Energy Transfer is developing a $9.6 billion export-import facility for liquefied natural gas on the Gulf Coast with partner BG Group, the U.K. gas producer that’s agreed to sell itself to Royal Dutch Shell. With oil prices down about 40 percent from a year ago, BG has yet to commit to its part of the investment, and Energy Transfer expects the facility won’t be in service until 2020, a year later than planned. “I’m not happy about it,” Warren says.
Generally, MLPs are overseen by one entity encompassing a general partner responsible for the operating units and strategy. In Energy Transfer’s case, that’s Energy Transfer Equity. ETE holds a 1.1 percent share of Energy Transfer Partners in addition to incentive distribution rights, essentially claims on the operating unit’s cash flow.
In theory, these claims give top managers an incentive to grow cash payouts to unitholders in the limited partnerships. As those distributions grow, the general partner’s share of the cash grows disproportionately. Payouts of IDRs can be enormous. Last year, Energy Transfer Partners paid ETE $504 million. Warren, who’s also chairman of ETE, has much of his wealth tied up in that entity.
Critics of MLP structures say the arrangement benefits the general partner at the expense of limited partners. Kevin Kaiser, an analyst at Hedgeye Risk Management, a Stamford, Connecticut, investment advisory firm, says limited partners’ relative benefit can shrink as the general partner’s share of the cash payouts balloons. “The more complex you make the MLP structure, the less obvious it is where these fees are going,” Kaiser says. “What [limited partners] pay that fee for is up for debate.”
In Energy Transfer’s case, says Bellamy of Robert W. Baird, they’re paying for the smarts and guile of one of the world’s top pipeline managers: Warren. Investors baffled by the complexity of Energy Transfer’s structure often park their money alongside Warren in publicly traded ETE. That entity’s total return to investors was more than 250 percent during the past three years, according to Baird.
Indulging his love of music, Kelcy Warren owns a studio in Austin and a record label.
Matthew Mahon/Bloomberg Markets
For all of his success, Warren remains a small-town sort of guy who likes to have buddies to his Dallas mansion on Wednesdays for beers, shuffleboard, and chain yanking. “He’s just a normal cat,” says Jimmy LaFave, the Austin singer-songwriter who co-founded Music Road Records with Warren in 2007. LaFave was playing a Dallas pub 20 years ago when Warren’s brother introduced them because Warren, barely a millionaire then, was too nervous to approach the singer. “For all I knew, he was a plumber,” LaFave says.
Warren started playing guitar after a friend gave him an acoustic for his 40th birthday. He now has more than 30 guitars, including a 1943 Martin D-28 “that just sounds incredible,” he says. He co-wrote a song, “Talk to an Angel,” on LaFave’s new album. “All you’ve got to do to get some bullshit you wrote on a record is invest in a record company,” Warren jokes.
The music business has hardly been a pipeline of profits. Music Road has released 18 albums, including a collection of songs written by a Warren favorite, Jackson Browne, as performed by Bruce Springsteen, Bonnie Raitt, and others. “Some of our projects make money; others don’t,” Warren says while chatting with LaFave, Ramsey, and Harris at the old Austin farmhouse that’s home to his Cedar Creek Recording studio. “It’s a hard business.”
Building pipelines isn’t so easy, either. New projects are encountering more resistance over safety, fracking, and environmental concerns. It’s a way to slow the proliferation of fossil fuels, says Karthik Ganapathy, communications manager for the climate activist group 350.org. “We’re building to a place where every single new pipeline will face a backlash,” he says.
Opposition from environmentalists recently prompted Energy Transfer to scrap plans for a new gas pipeline in Michigan; instead, it contracted with Vector Pipeline to connect with existing pipe. Warren says necessary infrastructure will get built, especially to move oil from shale deposits. “Pipelines are eminently cheaper and safer than shipping by rail,” he says. “I don’t think it’s fair for a few activists to decide what the American people want.”
Warren says he thinks Energy Transfer can more than double its pipeline mileage to 150,000 in the next 10 years. It would help, he says, if oil prices would stay low a bit longer. “The weak and the wounded will be vulnerable,” he says. “There will inevitably be those that feel they should consolidate into a more sustainable entity. We’ll be there.”
This story appears in the June 2015 issue of Bloomberg Markets.
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