Family of pipelines is growing even closer
MERGER: Energy Transfer Partners chief says company will combine with a sibling
Dallas pipeline magnate Kelcy Warren is beginning to consolidate his pipeline empire of four publicly traded businesses.
Warren’s Energy Transfer Partners said Monday it will merge with its sister company Sunoco Logistics Partners, which Energy Transfer acquired four years ago but maintained as a separately traded entity. It’s a $20 billion all-stock deal that would keep the Energy Transfer name for the merged company when the deal closes next year. Warren would be chief executive.
The intra-family merger combines Energy Transfer — mostly natural gas pipelines —with Sunoco Logisitics’ primarily crude oil network. The deal comes as Energy Transfer and Sunoco Logistics partner to build the controversial Dakota Access Pipeline that’s 85 percent complete.
Energy Transfer and Sunoco said the merger would give them increased scale and cost savings. But analysts said the move
appears aimed mostly at decreasing payouts to investors as the pipeline industry feels the effects of the energy bust and stubbornly low oil and gas prices. The deal is structured so the smaller Sunoco, which makes smaller distributions to investors, is acquiring the larger Energy Transfer.
As a result, Energy Transfer investors would see their quarterly payouts decreased by nearly 30 percent, said Brandon Blossman, energy analyst for Tudor, Pickering, Holt & Co. in Houston. The merger, Blossman said, is a way for Energy Transfer to reduce the flow of cash to investors without admitting, “we can’t keep our promises.”
Investors responded negatively to the deal Monday. Energy Transfer partners stock fell 7 percent to $36.52 per unit, down $2.85 for the day. Sunoco Logistics Partners dropped 6.5 percent to $24.47, down $1.72 on the day.
Warren’s Energy Transfer grew rapidly through an ownership model known as a master limited partnership model, or MLP, which favors growth in a tax-friendly structure. The company now functions through four publicly traded MLPs, which do not pay corporate income taxes and pass on most of their income to investors in payments similar to stock dividends.
The MLPs are the parent company, Energy Transfer Equity, the pipeline subsidiaries, Energy Transfer Partners and Sunoco Logistics, and Sunoco LP, which operates thousands of gas stations and convenience stores.
“Some people call us complex. I don’t think we are,” Warren said in a recent interview.
Analysts said MLPs work well when markets and profits are booming, but can’t justify the large payouts during downturns and periods of slow growth.
Warren, in a call with analysts Monday, acknowledged that it is “inevitable” that his company will consolidate further, eventually merging Energy Transfer Partners and Energy Transfer Equity in some fashion. But Warren emphasized that’s “probably substantially premature.”
Energy Transfer is expecting a $2 billion influx of cash though by selling a large stake of the Dakota Access pipeline, which has been the subject of violent clashes between protesters and police in North Dakota, and demonstrations around the country. Environmentalists and others have rallied to the cause of the Standing Rock Sioux tribe, which says the pipeline threatens sacred sites and sensitive natural resources.
Energy Transfer owns 75 percent of Dakota Access, and Houston-based Phillips 66 has a 25 percent stake.
After the sale is done — once the final federal permit comes through — Energy Transfer would still own the largest share at 38.25 percent. Canadabased Enbridge would pick up a 27.6 percent piece, and Ohio-based Marathon Petroleum Corp. would own 9.2 percent. The Phillips 66 share will remain unchanged.
Warren on Monday criticized the Obama administration for delaying the permit but expressed confidence that everything would be approved by the end of the year — before the energy-friendlier President-elect Donald Trump takes office in January.
“It’s absurd what’s happened to us,” Warren said. “This should be unlawful. We’ve done everything right.”