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Billionaire Pipeline ‘Cowboy’ Paves Way for Deal Making: Energy

By David Wethe and James Polson, January 27 , 2015

(Bloomberg) -- Billionaire pipeline owner Kelcy Warren knows better than most how the tumultuous energy market is ripe for empire-building.

Warren, who built a fortune worth $5.3 billion over the past 15 years through more than a dozen acquisitions, made a first move Monday designed to pave the way for more deals. His Energy Transfer Partners LP agreed to pay $11 billion to consolidate its Regency Energy Partners LP unit under one roof.

Energy Transfer said the transaction will strengthen its balance sheet, positioning itself to pursue more deals at a time when sinking oil and natural gas prices promise to push a flood of assets onto the market. Its goal is to become a more significant part of the crude transportation industry, and “a major player in the Marcellus and Utica shales.” Consolidating Regency leaves it “ideally positioned to achieve that goal,” according to a statement.

“He is clearly a very experienced deal maker,” John E. Olson, a fund manager and longtime investor in Energy Transfer, said in a phone interview. “Given his history over the last 20 years, you can probably expect more of the same.”

The 59-year-old East Texas native, who in a 2013 interview acknowledged his reputation as a deals-obsessed “cowboy,” is simplifying the Energy Transfer empire by consolidating a subsidiary that has lost almost a third of its value since September.

Warren’s deal could be a harbinger of more to come for energy companies tied to the ups and downs of crude prices, Chris Pultz, a portfolio manager at Kellner Capital in New York, said in a phone interview.

M&A Kickoff

“I would think it would be a kickoff for M&A in general in the energy space,” Pultz said.

Warren has never been content to let his business grow the slow way -- organically. Before yesterday, Warren’s pipeline partnerships had spent $11.2 billion buying rival assets after he declared a new season on acquisitions in September 2013. His previous buying spree exceeded $16.6 billion and included the purchase of pipeline owner Southern Union Co. and refiner Sunoco Inc.

“Acquisitions are in their blood,” said Jason Stevens, an analyst at Morningstar Investment Services Inc.

The market is ripe for further consolidation among pipeline companies because many are feeling weighed down by higher debt loads and low commodity prices, Stewart Glickman, an analyst at S&P Capital IQ in New York, said in a phone interview.

Holding Value

With cheap oil and gas straining balance sheets across the energy landscape, pipelines, processing units and storage tanks have retained their value better than drilling acreage and equipment. That’s prompting some producers to put their pipes up for sale to raise cash needed to prop up drilling operations. The result is a raft of buying opportunities for companies seeking to expand their reach or fill in blank spots in their networks.

Smaller pipelines operators may also want to cash out during a prolonged period of low oil prices rather than try to keep up with Energy Transfer on the treadmill of deals.

Buckeye Partners LP, NuStar Energy LP and World Point Terminals LP are near the top of the shopping list for large pipeline owners that are able to do deals now, said Olson, a former managing partner of Houston-based Pool Capital Partners LLC. The trio are attractive because almost all of their cash flow comes from contracted fees that don’t change with commodity prices.

Internal Growth

NuStar said it’s not looking to be bought. “We plan to continue to grow NuStar through our internal growth capital program and synergistic asset acquisitions, which we strongly believe is in the best interests of all NuStar stakeholders,” said Chris Cho, a spokesman for the San Antonio, Texas-based company.

Buckeye and World Point didn’t return calls requesting comment.

Smaller midstream companies are more apt to get picked off as they struggle to keep up with the growth of larger rivals, S&P Capital’s Glickman said. Investors will gravitate to the larger companies that boost cash returns to shareholders more reliably.

“It is an opportunistic market and there are probably more motivated sellers out there than there used to be,” Glickman said.

Regency’s Value

The cash-and-stock deal announced yesterday values Regency at about $11 billion, a 13 percent premium based on the Jan. 23 closing price, the companies said in a joint statement. Holders will get 0.4066 units of Energy Transfer plus a cash payment of 32 cents a unit. Energy Transfer Equity LP controls Regency through ownership of its general partner and already owns about 22 percent of the publicly traded units, according to data compiled by Bloomberg.

Warren’s latest acquisition comes less than a week after rival Richard Kinder struck a $3 billion deal for a pipeline company in the Bakken shale formation in North Dakota. Five months ago, the Houston billionaire consolidated his pipeline empire into one main corporation to strengthen it for growth.

Regency spent last year snapping up pipeline and processing assets, including reported talks to buy pipelines in the Marcellus Shale in New York and Pennsylvania from Talisman Energy Inc.

Consolidation Trend

Warren could follow the lead of Kinder Morgan and roll up the rest of the Energy Transfer group of publicly traded partnerships into one single company, Olson said. Energy Transfer’s companies own and operate about 71,000 miles (114,000 kilometers) of pipelines handling natural gas, liquids derived from gas, fuel and crude oil, according to today’s statement.

“That clearly is a desire on the part of most Energy Transfer investors,” Olson said. “It’s a matter of whether it makes the most sense.”

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