Photographer: Charles Mostoller/Bloomberg

A 30-Year-Old Analyst Is Taking on a Pipeline Billionaire

  • Hedgeye’s Kaiser wants to expel Energy Transfer parent
  • Kelcy Warren has about $3 billion in Energy Transfer Equity

Kevin Kaiser was on an airplane this summer, staring into his laptop, when he came up with the idea for taking on billionaire pipeline magnate Kelcy Warren.

He was scrutinizing a nearly year-old prospectus for Sunoco Logistics Partners LP’s acquisition of Energy Transfer Partners LP, an agreement that merged two parts of Warren’s energy empire. For months, the 30-year-old Hedgeye Risk Management LLC analyst had heard clients complain that the deal -- along with a host of other Energy Transfer moves -- enriched Warren but did little to benefit Energy Transfer Partners unitholders, Kaiser said in an interview.

Kelcy Warren

Photographer: John L. Mone/AP Photo

Reading the prospectus, Kaiser realized Energy Transfer Partners investors could band together and overthrow Warren’s control of their company.

“The hurdle is high, but there is something that can be done,” Kaiser said. “It’s a controversial idea, it’s a bold and new idea. But it’s also one that we think has a lot of support.’’

Energy Transfer didn’t respond to phone and email requests seeking comment for this story.

Kaiser has gone public with his pitch, arguing investors should keep buying units of Energy Transfer Partners while betting against Energy Transfer Equity LP, its parent. Energy Transfer Partners is returning way too much of its earnings to investors, Kaiser argued – and no one benefits from that more than Energy Transfer Equity, which is entitled to special payments called incentive distribution rights for managing the company. Warren is the top holder of Energy Transfer Equity, with more than $3 billion of his net worth invested, according to Securities and Exchange Commission filings.

Kaiser is no stranger to taking on big U.S. energy companies. He triggered a sell-off in Kinder Morgan Inc. shares in September 2013 when he called the Houston-based company a "house of cards," saying it wasn’t spending enough to maintain thousands of miles of pipelines and was returning too much cash to investors. More recently, he’s locked horns with pipeline operator Tallgrass Energy Partners LP, which he still recommends betting against.

This revolt won’t be easy. The Energy Transfer entities are tax-advantaged vehicles called master limited partnerships. Energy Transfer Equity is a publicly traded parent that owns the general partner of Energy Transfer Partners –- and used to own the general partner of Sunoco Logistics.

The MLP model has been repeatedly “abused,” Kaiser said, especially when companies grow so complex that it’s hard to track where different fees are headed. “Everything is inherently wrong” with incentive distribution rights, he said.

Holders of at least two-thirds of outstanding Energy Transfer Partners units would have to vote to expel Energy Transfer Equity as the current controller. The incoming general partner would probably then have to pay a large amount of money in cash to its predecessor, per the partnership agreement, Timm Schneider, an analyst at Evercore ISI, said in a note last week.

“Pulling this off doesn’t appear to be an easy feat,’’ Schneider said, adding that the “potentially large cash component could complicate things.”

While mustering that much support may prove impossible, Kaiser argues there’s a lot of upside in simply making an effort. If it’s successful –- which could take “years,” he said -- it could allow Energy Transfer Partners to, among other things, reduce its quarterly distribution payments, Kaiser said. He predicted that the move could send Energy Transfer Partners units up to $40, while pushing Energy Transfer Equity units down to $3 apiece.

Energy Transfer Partners fell 4 cents to $16.71 Monday in New York, dropping 30 percent so far this year, while Energy Transfer Equity slipped 13 cents to $16.18 and slid 16 percent over the same period.


High Bar

Kaiser acknowledges that not everyone is on board with his idea. Plenty have told him the bar is too high. Even if the effort fails, though, he said it could send a signal to Energy Transfer management to better look out for the interests of the Energy Transfer Partners unitholders.

“People just think it’s practically impossible,’’ Kaiser said of his critics. “But that’s fine, because where the stocks trade today implies close to a zero-percent probability of this happening.’’

As such, he said, betting on Energy Transfer Partners and betting against Energy Transfer Equity is a cheap -- but potentially profitable -- wager.

“I have a lot of respect for Kevin and his work,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas, which has a stake in both Energy Transfer entities. “I do not agree with all of his comments, but some are valid.’”

As for Warren, Kaiser said this isn’t personal.

“I do think the corporate governance at the company has been bad, whether that’s because Kelcy Warren deep down is a bad person or just because they’re just taking advantage of a situation that they can take advantage of,” he said. “I don’t know. I don’t really care. To me, Kelcy Warren, I don’t have any personal issue with the guy.’’

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