Endevco got into financial trouble after an ill-advised purchase of a refinery, paving the way for Warren’s first stab at profiting from a problem. In 1993, he and a well-heeled friend, Ray Davis, now co-owner of the Texas Rangers baseball club, bought Endevco out of bankruptcy. When they sold it two years later, Warren made $13 million. “It was more money than I’d ever dreamed of seeing,” he says. “So I chucked it all in the middle of the table, and so did Ray Davis, and we started Energy Transfer.”
The fall of Enron, which owned pipeline assets, offered Energy Transfer its earliest opportunities. “People were running from pipelines because all of a sudden they were persona non grata,” says Ramsey, a director for Energy Transfer’s parent, Energy Transfer Equity. “They became incredibly cheap, and Kelcy was one of the guys who not only identified it but executed on it.”
Pipeline companies make money by charging fees set in long- term contracts for moving molecules from point A to point B. They also can profit on spreads between spot market prices at different junctures. Increasingly, they’re also adding value to gas as it moves by using heat, cold, and pressure to fractionate dry gas into propane and other liquids in heavy demand in the U.S. and abroad.
Successful operators keep construction and maintenance costs low and their pipelines full from the minute they start pumping. While these companies aren’t totally insulated from swings in commodities prices, they’re better off than most, especially if they spread the risk over a diverse array of businesses.
Some of what the young Energy Transfer bought included pipes tapping the Barnett shale around Fort Worth—at a time when production there was beginning to climb. “We made a very ballsy move,”Warren says. Thinking he could funnel gas nationwide, he ordered up a 42-inch pipeline from the Barnett to East Texas and then on to Louisiana.
It was one of the first pipelines with a diameter that big in the U.S. Few pipe mills could supply the raw materials, and few construction companies had the requisite skills, making the fat conduit costlier than more-traditional pipe. But Warren’s sales team got contracts with the producers who would use the line, assuring it would be full—and profitable. Energy Transfer gave customers commemorative sculptures like the one in Warren’s office.
The willingness to take risk where others might not was typical of Warren, says Harris, a former Dallas Cowboys All-Pro safety who’s now director of a gas technology company owned by Energy Transfer. “At the same time, it’s expected that the people who work for him are going to fill that pipeline up,” Harris says.
Despite its appeal to investors, growth isn’t a goal in and of itself, Warren says. “Our strategy always has been about creating a more efficient hydraulic machine,” he says. The pipes and other pieces of the system have to work well together, transporting the right products to the right hubs, ports, and processing facilities. The machine, as of 2010, was getting almost all of its revenue from gas in Texas. Making money was becoming tougher because shale production up north had created a glut that cut prices. Warren decided he needed a bigger and more diverse network.
On a Friday evening in March 2011, Warren had come to relax with Amy and Klyde at his ranch near Palestine, Texas, after losing a bid to buy a trove of pipelines and other properties from Louis Dreyfus Highbridge Energy. The lake there shimmered beneath a flawless sky as he nursed his disappointment over missing out on a chance to expand his gas liquids business, where margins can be much larger than for pure gas.
He and Klyde were about to take a spin on ATVs when Warren’s mobile phone rang. He took the call on the lakeside deck, where cell coverage was good. An investment banker told him Energy Transfer could win the Dreyfus deal if Warren could stomach a higher price and other conditions. Within 90 minutes, he’d gotten his board of directors, all by phone, to give a go- ahead on what would be a $2 billion acquisition.