Energy Transfer Partners Struggles Towards Top Spot

by | Dec 23, 2016

All Kelcy Warren wants is to join the big league of energy companies. Instead his Texas-based pipeline company Energy Transfer Partners has become the whipping boy for all of the industry’s deeds.

Warren, the son of an oilfield worker from rural East Texas, founded Energy Transfer in 1995. When Enron collapsed, Energy Transfer snatched up pipelines at incredible discounts and then, starting in 2009, rode the commodity boom with projects ferrying natural gas from the West Texas Permian basin to the processing hub of Corpus Christi.

Then, a few years ago, the company embarked upon a multi-billion expansion plan in a bid to go from local Texas superstar to a national player. The aim was to join much larger pipeline companies like Enterprise Energy Partners or Canada’s Kinder Morgan by having a national pipeline network and near to as much volume in contracts.

Pipeline’s can only carry a fixed amount of oil or gas, so companies like Energy Transfer can only grow by expanding through acquisitions or construction that broadens their networks. This year, it became clear that neither is a smooth path. After a massive attempt to takeover a rival for $33 billion failed, the company then came face to face with the Standing Rock Sioux tribe and environmental activist protesters in North Dakota who stymied a new pipeline that would’ve offered access into the potentially lucrative Bakken region.

The delays and setbacks come as Energy Transfer’s debt is approaching levels that are twice what the rest of the industry typically carries. Having spent heavily to grow its network, it needs to see projects come to fruition and begin generating cash flow to repay the debt. And what happens in 2017 could determine whether it lands as an industry darling or a battered embarrassment.

“It’s a bump in the road,” said Tom Seng, a 30 year veteran of the industry, now a professor at the University of Tulsa. “But their assets are in good places.”

Energy Transfer’s growth spurt which started slow around 2012 ramped up just in time to collide with the 2014 collapse in oil prices. For Warren, this was actually a lucky break — because the company was protected by long fixed-fee contracts. It took advantage of the slump, making a series of acquisitions at a discount.

“We got so lucky,” Warren told Bloomberg in May 2015. “All of our competition vaporized.”

While other companies pulled back, Warren pushed forwards with projects like the Rover, Revolution, and the Dakota Access pipelines.

Most pipelines — dubbed “midstream” companies in the industry — are structured as master limited partnerships, or MLPs, and typically take on large amounts of debt to fund capital intensive projects. On top of this, they pay out a large fixed portion of their profits as quarterly dividends to shareholders, which makes them largely reliant on borrowing.

By early this year, borrowings from the spree were starting to mount. At the end of the first quarter, debt had reached 8.3 times earnings before interest, taxes, depreciation or amortization — or Ebitda — in the first quarter of 2016, compared to industry targets of around 4.5 times. It’s still one of the highest among its peers.

“They definitely got hit for being more aggressive,” said Matt Schmid, senior energy analyst at Stephens Inc, describing the company’s stretched finances.

Then, this past summer, Energy Transfer planned to buy competitor Williams Company for $33 billion, which would have instantly made it an industry leader explained Tom Seng.

But then Energy Transfer pulled out on June 29 after months of wrangling with lawsuits on both sides.

“They couldn’t come up with the cash,” said Seng, who called the failed deal a “black eye” for the company.

A spokesperson for Energy Transfer disagreed and said the deal fell through because a tax-free status for the transaction was uncertain.

In August, on the heels of this upset, Energy Transfer met its biggest challenge yet. Stirrings of opposition, evident as early as 2014, to the Dakota Access Pipeline by the Standing Rock Sioux tribe exploded. The pipeline would travel under Lake Oahe, upstream from the tribe’s water intake and protesters say it’s just a matter of time before a leak occurs.

An early September video by journalist Amy Goodman showing private security hired by Dakota Access letting loose dogs on self-described “water protectors” further fanned the flames along with Warren’s unwillingness to consider a reroute after the Obama administration’s request for a voluntary pause the following week.

“I don’t think it helps that Kelcy Warren is saying, ‘no compromise,’” said Seng.

The conflict quickly morphed into a globally recognized struggle pitting Native Americans and environmentalists against North Dakota law enforcement and Energy Transfer, suddenly the avatar for fracking, fossil fuels, corporate conflict with local communities, and the global failure to rapidly transition to renewable energy.

“It represents standing for lands everywhere in the world,” said indigenous woman and activist Vaimoana Niumeitolu at a November protest against the pipeline in New York’s Foley square. For Alex Ferrena, an organizer with the International Socialist Organization, it’s also about more than Dakota Access. “This particular struggle highlights a resistance and a rejection of fossil fuels in general,” he said.

Energy Transfer seems to have stepped on a hornet’s nest, evoking a deeply symbolic response with potentially historic implications. “It starts to impact every kind of energy infrastructure project that is being being contemplated,” said Seng.

According to court filings in mid-November, delays have cost the company $450 million. And the company has said it will be acquired by sibling Sunoco Logistics, also owned by Warren’s holding company Energy Transfer Equity. Pooling the assets of the two companies will help manage the debt burden while control of the company will stay in Warren’s hands with Energy Transfer executives taking top spots. The catch, quarterly payouts aren’t nearly as high.

But Schmid explained, it’s part a larger pattern of MLPs turning towards financial health over big returns while oil prices stay low, a trend understood and encouraged by investors. The merger is expected to occur in the first quarter of 2017.

The election of Donald Trump as President of the United States might help. On December 4th, the Obama administration denied a needed permit to drill under Lake Oahe, the final section of the pipeline, but this has likely just deferred action to president-elect Trump. Trump, who has promised to lift restrictions on American energy production. Most recently, he told Fox News on December 11 that he would “have it solved very quickly.”

But before Trump takes office, Energy Transfer may have another hurdle. On January 1st, the original anticipated completion date, oil shippers could try to renegotiate contracts inked in 2014 when crude oil was trading for over $100 a barrel. Today it’s somewhere around $50 a barrel and the number of active rigs has plummeted from almost 200 in 2014 to around 30 this fall, according to the U.S. Energy Information Administration.

Production in the Bakken has declined dramatically since then and the Dakota Access pipeline would serve a still contracting market, according to a recent report from Sightline, a non-profit which promotes renewable energy.

“You’re going to have to see a major rebound in prices in order for Bakken production to stem its decline,” said Clark Williams-Derry, one of the report’s co-authors. He said the push is largely about avoiding stranded assets.

Still, Energy Transfer has a plan to wait things out. The company will soon finalize a sale of stake in Dakota Access to Enbridge and Marathon Partners giving it $2 billion in cash to shore up the company’s finances and complete the vital growth project.

And in late 2017, Rover Pipeline is anticipated to come online while two other smaller export projects to Mexico will open a new market. By 2018, Warren’s aspirations may be realized.

Then again, maybe not. On Dec. 9, inspired the the Standing Rock, protesters in West Texas chained themselves to the entrance gates of Energy Transfer’s Trans-Pecos Pipeline construction site.

It seems Warren’s path to oil titan won’t be as straightforward as he hopes.