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Who Got Rich This Week: Pipeline Billionaires Benefit Big From Rebounding Energy Prices

News Article Sponsored by Oilfield Helping Hands

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After suffering a steep plunge to below $27 per barrel in late January, crude oil may finally be on the rebound. Energy ministers from Iraq, Kuwait, Venezuela, Saudi Arabia and Nigeria, as well as non-OPEC members such as Russia and Mexico, are convening in Doha this Sunday to discuss deals that would freeze oil production, sparking hopes that oil prices will finally stabilize after a tumultuous year. Natural gas, which has fallen steadily in price in the past year, is also bouncing back, further fueling the recovery of energy stocks.

One big benefactor is Energy Transfer Equity (ETE), which saw a 32% pop in its share price in the past week. Co-founded by billionaires Kelcy Warren and Ray Davis in 1995, the pipeline giant has transformed from a little-known firm that moved natural gas within Texas, to a nationwide network of oil and gas transportation and processing facilities. Born to an oil field worker father in rural east Texas, Warren first got into the business by working as a welder’s helper, fixing pipeline leaks at his dad’s company. The 19-year-old, who had come home after flunking out of University of Texas at Arlington in his freshman year, attended classes at night and eventually went back to UT for an engineering degree.

Following stints at various pipeline outfits, Warren decided to buy a former employer, Endevco, out of bankruptcy with his friend Ray Davis. The duo flipped the company two years later and pooled their proceeds to start Energy Transfer. Though the business struggled initially, ETE hit its big break when the infamous Enron scandal sank the energy giant, driving down the price of pipelines as wary investors fled. ETE started snapping up pipelines at deep discounts. Warren expanded the company as commodity prices skyrocketed between 2009 and 2014, increasing its revenue roughly ten-fold during the five year period.

Warren, who is still the CEO and chairman, gained nearly $430 million in the past week from his 18% stake, lifting his net worth to $2.4 billion. Notoriously private, Davis retired from Energy Transfer in 2007 and now spends his time on his MLB team, the Texas Rangers, which he bought with other investors in 2010. The former co-CEO holds a 6.5% stake, which rose by $156 million last week, giving him a net worth of $1.9 billion. ETE president John McReynolds, who left an international law firm to join the team in 2005, also earned $57 million as the stock rallied.

ETE shareholders may have another reason to be optimistic. Last September, the Dallas-based company announced a $32.6 billion merger agreement with fellow energy transportation and processing company Williams WMB +3.12% Cos. With U.S. oil trading at around $50 per barrel at the time, ETE estimated that the synergies from the merger would exceed $2 billion per year by 2020. However, as energy prices tumbled, much of the projected savings have evaporated. Williams’ credit rating was downgraded to junk status along the way, creating a potential hurdle for ETE in two years when it needs to refinance the $6 billion loan it has to take out to complete the acquisition.

To prepare for the future debt repayments, ETE issued 329.3 million convertible preferred units in a private offering in March (Warren received over half of the units). The shares had an unique condition – instead of paying for the units outright, investors will fund the purchase by getting reduced dividends for up to nine quarters on their existing common shares. While this move frees up cash for the company, Williams is incensed that the offering was not made available to its own shareholders. The Oklahoma-based company responded with a lawsuit on April 6th, and won a motion this week to expedite the litigation. With rising borrowing costs and diminishing benefits, ETE shareholders may now be rooting for signs of the deal crumbling, though ETE could be on the hook for a hefty break-up fee should the two sides scrap the agreement.


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