Pipeline ’Chess Master’ Cuts Third Deal Since 2011 for Su

Energy Transfer Partners LP (ETP) Chief Executive Officer Kelcy Warren flew to Philadelphia near the end of February to discuss a pipeline project with his counterpart at Sunoco Inc. (SUN) Before the talks were over, he’d decided to buy the whole company for $5.3 billion.

Warren’s agreement to purchase Sunoco is the third time he’s swept up a rival pipeline operator in the past 13 months, paying a total $12.6 billion in cash and shares. Each deal has been calculated to expand Dallas-based Energy Transfer’s footprint and business mix, transforming it from a regional natural-gas pipeline operator to a national shipper of gas, crude and refined fuels.

The transactions show Warren’s willingness to move quickly to seize opportunities, said Chris Eades, a fund manager at Legg Mason Inc. (LM)’s ClearBridge Advisors LLC in New York.

“I don’t think there’s anyone out there who would doubt his eagerness to do transformational deals, or his vision,” Eades said yesterday in an interview.

Energy Transfer and its affiliate, Regency Energy Partners LP (RGP), agreed to buy LDH Energy Asset Holding LLC for $1.93 billion in March 2011. Last summer, Energy Transfer’s parent company, Energy Transfer Equity LP, prevailed in a bidding war against rival Williams Cos. (WMB) to buy Southern Union Co. for $5.4 billion. That transaction closed in March.

“Southern Union had just barely finished, and they’re off on another one,” Eades said.

Starting Out Regional

Warren, 56, who also serves as chairman, co-founded Energy Transfer (ETE) in 1996 as a regional pipeline network based in Texas. The company was able to sign profitable contracts with gas shippers by taking advantage of price variations at different delivery points in the state, said Bernard Colson, an analyst with Global Hunter Securities LLC. Shares of the partnership more than doubled to $64 from $27.18 between 2005 and 2007 as new drilling and production techniques unlocked gas supplies in the Barnett Shale in Texas, raising demand for shipping lines.

Ranked as the 546th richest person in the world in 2012, according to Forbes, Warren has forged a different path as an energy executive. He splits his time managing pipelines with a music business, Music Road Records, he started in 2007 with two partners in Austin, Texas. In February, he donated an undisclosed sum to have a park in Dallas’s central business district named “Klyde Warren Park,” after his son, who was 9 at the time, according to the Dallas Morning News.

‘Chess Master’

Warren’s diverse interests don’t detract from his penchant for pipeline deals, said Ethan Bellamy, an analyst for Robert W. Baird & Co., who calls the CEO a “chess master.”

“To be a dealmaker like he is, it helps to be amiable, gregarious and personable,” said Bellamy, who has visited Warren’s ranch near the Wolf Creek ski resort in Colorado. “He sees two or three moves ahead.” Bellamy rates Regency an outperform, or a buy, and doesn’t rate Energy Transfer’s other units or Sunoco.

Warren saw earlier than other pipeline operators that gas would become less profitable for shippers because the price differences that boosted profits were narrowing across the country, Eades said.

The CEO said in a 2009 interview that Energy Transfer needed a “transformational” deal to adapt.

Oil Profits

Energy Transfer’s purchase of Southern Union was a first step toward a transformation, bringing gas pipelines in Florida and the Midwest that gave the company a national reach. Energy Transfer now owns about 45,000 miles (27,962 kilometers) of pipelines, making it the biggest U.S. gas pipeline operator until Kinder Morgan closes its acquisition of El Paso Corp. (EP) later this year.

When the Sunoco transaction is finished, Energy Transfer will get 30 percent of its revenue from oil, refined products and other “heavier hydrocarbons,” the company said in a statement. Shipping crude and other liquids will protect Energy Transfer from the decline in gas profitability, Warren said in an interview yesterday.

“We think that’s the answer for Energy Transfer,” he said.

Sunoco, based in Philadelphia, had been shutting or selling its refineries to focus on pipelines and storage under former CEO Lynn Elsenhans. With a last operating refinery slated for sale or shutdown, the company became more appealing to Warren, who sought its 7,900 miles of pipelines and terminals stretching from Texas to New Jersey.

The two companies already had good chemistry, based on discussions between staffers about other projects, Brian MacDonald, Sunoco’s current CEO, said in an interview.

Expanding the Deal

Warren originally sought MacDonald’s cooperation to convert Energy Transfer’s Texoma gas pipeline to carry oil and connect it to Sunoco’s Nederland storage terminal. Quickly, Warren expanded the talks to other potential deals, MacDonald said.

“Those are meetings you always want to take,” he said.

Sunoco holders will receive about $50.13 a share, consisting of $25 in cash and 0.5245 common unit of Energy Transfer, according to a joint statement yesterday. Dallas-based Energy Transfer is paying a 23 percent premium above the April 27 closing price for Sunoco.

The purchase includes 4,900 Sunoco-branded retail fueling stations in the U.S. as well as its 32.4 percent share of Sunoco Logistics Partners LP (SXL)’s common units, which Sunoco controls through its general partner, according to the statement.

Sunoco’s retail business is “not core” for Energy Transfer, Warren said. The retail units may be put into a master-limited partnership, MacDonald said.

Moody’s Investors Service put Sunoco Logistics, the company’s pipeline division, under review for a bond rating downgrade, citing Energy Transfer’s high debt and its “very substantial cash needs.”

Energy Transfer Partners rose 2.7 percent to $50.98 at the close in New York. Energy Transfer Equity rose 1.9 percent to $42.77 and Sunoco rose 0.9 percent to $49.72.

To contact the reporter on this story: Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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