Trump’s Texas Tests

In a year that included an election where everyone lost money in the office pool (and Clinton lost far more); a protest that actually accomplished something; and a scandal that rocked not only the DNC, but the collective American political system, there was bound to be some residual damage. Some are happy with the results of the election while others are still threatening to use their passports to escape an evil president-elect who makes them cry. Truth is, there are more than a few red flags on the horizon reminding us that just because it happened in 2016 doesn’t mean it won’t follow us into 2017. You can be sure Trump will be put to the test.

Up first, big oil – also known as the black snake in Sioux territory; fossil fuels in the Rockefeller circles in New York and paychecks in many homes across the country.

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The Drama

This time last year, those who held a stake in the Energy Transfer family watched closely as several events unfolded. At the end of September, the company’s owner, Kelcy Warren, announced a merger between Energy Transfer Equity and Williams Companies ($WMB) that would be worth more than $37 billion. There were many questions, including a few about Warren’s ethics – from both personal and business perspectives. Initially, his efforts in acquiring Williams were unwelcomed. The first offer made to Williams was for more than $53 billion. Two months later, it was worth around $37 billion. Williams accepted the offer, recognizing any kind of recovery in the sector would be slow; it opted to cut its losses.

As 2016 kicked off, there were cracks in Warren’s golden egg. There was little doubt the deal was going south and eventually, a judge allowed Warren to rescind the offer based on some tax loophole. Even as this was unfolding, Warren was taking steps to cover his assets. In a SEC filing, he disclosed the “completion of issuance of convertible units” which would allow a few investors to “receive the Preferred Distribution Amount”. It was legal, even if it was underhanded. By the time this bad deal was put to rest, Energy Transfer’s CFO Jamie Welch had left the company and filed his own lawsuits against his former employer.

#NoDAPL

This summer, setbacks continued. This time, it was the Dakota Access Pipeline protests. Standing Rock Sioux Tribe says the pipeline is too close to its primary sources of drinking water. The Tribe is ~10,000 strong and located mostly in the Dakotas. What’s awe-inspiring is the way they’ve carried out the months-long protests. They’ve drawn thousands of supporters and have a GoFundMe campaign that’s collected more than one million dollars, making it one of the most successful in GoFundMe’s history.

The protesters have been peaceful. Law enforcement, on the other hand, used high-pressured water cannons and “concussion grenades”, against protesters. These crowd control efforts led to many injuries, many serious enough to require medical attention. There’s been at least one injury to the arm of a protester who still may lose it and another protester may lose her eyesight. Dogs from different law enforcement agencies have also attacked protesters.

The Army Corp of Engineers issued a ruling earlier this month that effectively halted the progress of the pipeline. It should be noted the pipeline is nearly complete – less than 1 mile remains unfinished. It’s costing millions every month the protests continue and the project remains unfinished.

Warren has become the villain of the natural gas and oil industry. When the ruling came down earlier this month, he immediately declared it“politically motivated” and that drilling would continue with no reroute to bypass the area that’s being contested. The company lost another battle this past week when a judge refused to allow the drilling to continue and instead said the court would hear arguments at the end of January.

Here’s where it gets interesting. If the pipeline’s not finished by January 1, 2017, the companies involved can opt to renegotiate the contract or they can simply walk away. That’s the likely scenario. The initial contract was signed when oil was closer to $100 a barrel versus the $45 per barrel it is today. There was a justifiable use for the new pipeline three years ago, but these days, the oil fields aren’t at capacity, again, courtesy of the collapse in the energy sector. Whether anyone wants to admit it, there’s really no reason for adding to the intricate freeway of underground gas and oil pipes that crisscross through this continent. Major investments are being made in cleaner energy sources and that is not going to change.

From The Institute for Energy Economics and Financial Analysis report:

Because the economic prospects for Bakken oil producers have dimmed dramatically since early 2014, oil shippers…may attempt to renegotiate terms when ETP misses its Jan. 1 deadline, seeking concessions on contracted volumes, prices, or contract duration. Moreover, if oil prices remain low, as projected, Bakken oil production will continue to decline, and existing pipeline and refinery capacity in the Bakken will be more than adequate to handle the region’s oil production. If production continues to fall, DAPL could well become a stranded asset—one that was rushed to completion largely to protect favorable contract terms negotiated in 2014.

Texas Taxes

As if all of that weren’t enough, Energy Transfer is now in the crosshairs of the tax man. Texas, like every other state, offers incentives for companies. One controversial program has been manipulated in such a way that allowed Warren’s companies to claim more than $250 million in tax breaks. In a five-year period between 2011 and current day, there have been at least 15 deals uncovered that link to the Texas Economic Development Act, which is touted as the state’s largest corporate welfare program. This story broke a few days ago and has the potential to snowball.

The Trouble with Trump

So how does the new president fit into all of this? Trump has consistently come out on the side of ETP. He’s vowed to undo the Army’s project halt as well as anything Obama tries to do in his final days in office. By the time Trump takes office in late January, it may be too late since the contracts expire January 1. Trump received campaign donations and up until a few weeks ago, he had investments the ETE family.

Two things happened as I was writing this and there are bound to be huge uproars:

Trump is expected to announce he’s chosen Rex Tillerson, CEO of Exxon, as Secretary of State this morning. The question is: will Exxon be allowed to run with the $500 billion deal with Russia it worked out before the sanctions hit? He’s not the only Texan who will be named part of the Trump team later today. There’s a lot of debate when it comes to Putin’s own motives, but we need Russia as an ally. We must find a way to rebuild those important, though fragile relationships with the countries Obama spent 8 years tearing down.

Trump is also expected to formally announce he’s tapped his one-time political foe and former Texas Governor Rick Perry to oversee the Energy Department. Perry was given a lucrative position on the Energy Transfer Partners board in February 2015. The Houston Chronicle offered, “Life outside the governor’s mansion has proven profitable for Rick Perry”. You may recall this was around the time Perry was facing felony charges in Texas, but that didn’t serve as any kind of speed bump for Warren. When Perry announced he was running for president a few months later, it was Warren who greased the financial wheels. And now, Perry will likely be named as the head of the Energy Department in the Trump Administration.