The road to Energy Transfer Equity LP's $26.55 billion buyout of Energy Transfer Partners LP has been strewn with brash moves, monumental expansion and a few failures as a corporate chief consolidated a large chunk of the North American energy pipeline sector.

Stockholders approved the merger Oct. 18, meaning the unified Energy Transfer family will end its reign as the last energy pipeline major to hold on to the traditional master limited partnership structure, which has struggled to the point that massive midstream peers like Williams Cos. Inc. and Enbridge Inc. have abandoned the model.

Pipeline companies began forming MLPs to house pipeline and other midstream assets in the 1980s. These partnerships zeroed out corporate taxes and produced steady distribution income for investors. The structure came to dominate oil and gas infrastructure finance as firms also used the model to funnel money to the controlling general partners, but a commodity price downturn beginning in 2014 and income-oriented investors' exit from the pipeline sector put pressure on MLPs' cash-leaking model.

On the path to adopting a simplified corporate structure, Energy Transfer leader Kelcy Warren has adjusted his approach, constantly experimenting and adapting to bet big in an environment that has not always rewarded those forays.

Growth spurt

The Energy Transfer family started out as an intrastate natural gas pipeline company in 1995 and owned just 200 miles of pipelines in 2002. It spent the first several years of the 2000s snapping up individual assets, such as the Houston Pipeline system in 2005 and the Transwestern pipeline in 2006. The pace and scale of growth, however, accelerated when Warren became CEO of Energy Transfer Partners in 2007 and sought to construct new interstate pipelines as the shale revolution progressed.

Warren's vision also focused on acquiring whole companies that both increased the companies's share of the North American gas transportation sector and expanded those holdings to include crude oil and NGL pipelines. After Energy Transfer Equity, or ETE, acquired Regency Energy Partners LP's general partner in 2010, the Regency Energy Partners and Energy Transfer Partners, or ETP, formed a joint venture following their acquisition of Louis Dreyfus Highbridge Energy LLC's NGL assets.

The high-stakes deals continued as ETE added Southern Union Co. to its portfolio for $9.4 billion in 2012, and ETP bought Sunoco Inc. for $5.6 billion in stock and cash later that year. Both targets were merged with existing subsidiaries as the many-tentacled Energy Transfer started to consolidate its holdings.

ETE further collapsed its corporate structure in 2015, when ETP merged with Regency Energy Partners with and into one of its indirect subsidiaries, ending competition between the two MLPs. The winding road that had begun in 2010 with the general partner transaction highlighted one prong of Warren's unorthodox strategy.

"Kelcy did something that you'd never seen people do before, which was he would approach and buy the [general partner] of an MLP, which gave you effective control, and then leave it public," MUFG Securities Inc. midstream energy analyst Barrett Blaschke recalled in an interview. "A lot of times, it didn't feel like a cohesive story, but the cash flow always came."

Circumstances changed when oil prices plummeted later in 2014. MLP stock prices followed, and as crude bottomed out in February 2016, the bellwether Alerian Midstream Energy Index hit its lowest point since 2008. With insufficient liquidity to ride out the downturn, many partnerships slashed distributions. Energy Transfer did not but still felt pain on Wall Street as ETP and ETE stock sank 48% and 76%, respectively, between November 2014 and March 2016.

Blocked combinations

Warren did not let the negative sentiment toward pipeline companies stop Energy Transfer from pursuing what he dubbed a "surreal" megamerger with Williams.

The transaction, when it was announced, had a price tag including debt of $37.7 billion, but as midstream values collapsed, Energy Transfer's enthusiasm turned into buyer's remorse. When ETE's law firm could not generate a tax-free opinion for the combination, the deal was terminated in June 2016.

"It is safe to say we will never again pursue a deal where the management team on the other side is not supportive of it. No [more] hostile actions," Warren said in an email, referring to both the Williams deal and an unsolicited bid for NuStar Energy LP in 2018.

"They really harmed their reputation" with the Williams deal failure, said Simon Lack, managing partner at the energy-focused investment firm SL Advisors LLC. Warren "understands very well how to run the business and the strategic benefits of acquiring assets and connecting them to the network, but corporate governance … he'd get one of the lowest ratings of anyone I can think of," Lack said.

Roadblocks aside, Warren was still gung-ho about consolidating Energy Transfer Partners' holdings. In a 2017 reverse merger, ETP combined with Sunoco Logistics Partners LP, further trimming the midstream behemoth that Energy Transfer had constructed.

Shoring up credit to bet big again

The MLP sector's identity crisis only heightened investors' anxiety about corporate simplification as ETP's peers ditched their required cash payments to their general partners and slowed down distribution growth, with some abandoning the partnership model altogether. Warren pushed back but acknowledged that ETE and ETP planned to merge before the end of 2019.

What tipped the balance in favor of consolidating sooner rather than later were promises of investment-grade credit for the simplified MLP. ETP is rated BBB-, the lowest investment-grade rating, by S&P Global Ratings, while ETE is rated three notches below that at BB-.

"As much as Energy Transfer would push the envelope and you would always have to stay a couple of steps ahead of them, I was never concerned that they would … do something completely crazy," S&P Global Ratings midstream analyst Michael Grande said in an interview. "They would never jeopardize their investment-grade rating."

Warren has no plans to jeopardize his control over Energy Transfer, either. The newly created series of class A units that ETE will issue to its general partner in the merger means the general partner and its affiliates will retain the same relative voting interest in ETE as before the consolidation. "I believe that partnership governance is far superior to corporate governance, making it much less likely that unproductive shareholder activism will take place," Warren said in an email.

In the near term, the partnership plans to stay out of the M&A market. But with a Dakota Access pipeline expansion and other major projects in the cards, analysts do not doubt that Warren will take more risks to try to make Energy Transfer the biggest and best-performing midstream company in North America.

"They've never lacked guts," MUFG's Blaschke said. "They've bet big and walked, but ultimately I think they've done a good job growing the thing."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.