At Energy Transfer, shale boom brings big growth and big debt | Dallas Morning News

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At Energy Transfer, shale boom brings big growth and big debt

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Energy Transfer Partners

Energy Transfer has had to borrow heavily to fund its multibillion-dollar takeovers and to build pipelines like this one in the Eagle Ford Shale. Its network spans 71,000 miles.

By JAMES OSBORNE Staff Writer josborne@dallasnews.com

Published: 23 September 2014 07:55 PM

Updated: 23 September 2014 07:55 PM

In 2009, Kelcy Warren’s Energy Transfer companies were relatively small-time players in the pipeline industry, a less than 2-decade-old operation still focused on transporting natural gas around Texas.

Five years later they command one of the largest pipeline networks in the country, spanning 71,000 miles from coast to coast — about four times what they had five years ago. They own the Sunoco and, as of late last month, Stripes gas station chains. They have moved into oil and other fuels and are building what will be one of the longest oil pipelines in the country, connecting to North Dakota’s booming Bakken shale formation. At the same time Warren, the company’s largest shareholder, has amassed a net worth of $3.4 billion.

But Energy Transfer has had to borrow heavily to fund its multibillion-dollar takeovers and pipeline build-out. As of June 30, the company counted a debt load of $25.9 billion, almost four times what it was in 2009, according to filings with the Securities and Exchange Commission.

In the midst of a shale drilling boom that has increased U.S. oil production 35 percent since 2009, the pipeline sector at large has been borrowing wildly in a race to control the flow of oil and natural gas. But Energy Transfer stands out.

Parent company Energy Transfer Equity has one of the highest ratios of debt to earnings before interest, taxes, depreciation and amortization in the industry, according to data analysis by Bloomberg. That ratio, commonly used by credit analysts, essentially compares leverage to profit.

In an April report, the credit ratings agency Moody’s Investors Service described Energy Transfer’s leverage as “a concern” and “exacerbated by recent acquisitions and heavy growth.”

No slowing down

Within the company’s Dallas headquarters, there are no plans for slowing down. Energy Transfer CFO Jamie Welch said that even as prices were being bid up by rivals Kinder Morgan and Williams, the motto was growth. He began rattling off $26 billion in projects underway right now, including $11 billion for a liquefied natural gas export facility in Louisiana that still awaits final approval.

“I think if we look back 30 years from now, we’ll see there was never again a time like this,” Welch said. “I don’t think anyone really knows if [the pipeline] space is overvalued. But we do know we have an attractive cost of capital and a tremendous resource.”

In essence, Energy Transfer is betting that the U.S. shale boom is going to continue for a long time, increasing demand for pipeline space. That’s a view shared by many oil and gas drillers and analysts. They liken hydraulic fracturing and horizontal drilling to a manufacturing process in which the usual risks are minimized.

But there is an undercurrent of skepticism that as more and more shale deposits are tapped here and abroad, oil prices will fall and stay low for a sustained period. Some analysts believe that by 2017, oil will fall below $80 a barrel, considered the break-even point for fracking wells.

“Everything is cyclical. And we’re running one heck of a cycle right now. The key is how long is it going to last,” said David Mahmood, chairman of Dallas investment firm Allegiance Capital. “If you bet wrong, and if you bet too much debt, you lose the ranch. The thing Energy Transfer is doing is betting on a business they know well. It’s a calculated risk.”

Were U.S. production to fall, companies like Energy Transfer would be left watching their volumes fall as they’re still paying off their pipelines.

Pipeline fees

In the short term, pipeline companies are protected by contracts that can extend up to 10 years on crude pipelines. Even were production to decline, the drilling companies would be stuck paying the pipeline fees in the short term, said Jason Stevens, an energy analyst with research firm Morningstar.

But growth would be hurt, a potential blow to a company whose investors expect steady increases in dividends.

“If oil goes below $80, it will be interesting,” Welch said. “But as we see the evolution in technology, the efficiencies you’re seeing in this business are amazing.”

Critical to Warren’s plans is approval by the credit ratings agencies, which essentially determine how much it costs Energy Transfer to borrow money.

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