NEW YORK (Reuters) - An energy market rout has ravaged fortunes from Texas to North Dakota and hit thousands of small investors, but some tycoons are still coining it in thanks to a piece of financial engineering that has tilted the playing field in their favor.

Natural gas flares are seen at an oil pump site outside of Williston, North Dakota March 11, 2013. North Dakota's booming oil business has quickly ran up against a serious shortage of housing for the thousands of workers who have poured into the state looking to cash in on the Bakken oil formation that has made North Dakota the second-largest oil-producing state after Texas. Picture taken March 11, 2013. REUTERS/Shannon Stapleton (UNITED STATES - Tags: BUSINESS ENERGY ENVIRONMENT COMMODITIES) - RTXY9SQ

U.S. pipeline billionaire Kelcy Warren, for example, has pocketed over $300 million in cash payouts from his company Energy Transfer Equity ETE.N since the price of oil started to crater in mid-2014, according to a Reuters analysis based on filings with the Securities and Exchange Commission.

Warren is on course to receive over $200 million this year, should the company not cut its distributions.

The private equity firms that back the general partner of Plains All American PAA.N, another oil and gas pipeline behemoth, have received hundreds of millions of dollars in payments.

That was made possible by master limited partnerships (MLPs) - a tax-exempt corporate structure that helped finance tens of thousands of miles of pipelines needed to carry gas and oil unlocked by the shale drilling boom of the past decade.

The meteoric rise of what at its peak was a $700 billion industry, attracted both industry veterans such as Warren and thousands of retail investors. The big draw, besides fat returns of the boom era, was the sector’s focus on pipeline operators, who appeared immune to the ups and downs of oil and gas prices thanks to long-term contracts based on traffic volumes.

The way most MLPs are structured also means big players - general partners - get a disproportionate share of the payouts and have near-total control over the companies.

That did not seem to matter when MLPs were growing rapidly and even small shareholders - limited partners - were cashing in handsome distributions.

It started making a difference once producers started going bust, throwing in doubt the sustainability of long-term contracts and pipeline MLPs’ profits, and sending their shares tumbling by more than 40 percent since September 2014.

While general partners still had millions flowing in, retail investors were left counting their losses.

Energy Transfer Equity declined to comment for the story. Kelcy Warren and Plains All American did not respond to requests for comment.

NO RETIREMENT

Lee Nelson, 63, plowed around $700,000 into MLPs, including $105,000 into Energy Transfer Partners, Warren’s MLP. He received as much as $40,000 a year in distributions, but lost $200,000 in the stocks, which made him delay retirement from his job as a service manager for a company that repairs heavy trucks in Arnold, Missouri.

“Retirement is out of the question for me, I don’t think I can recover from this,” Nelson said. “I’ll end up dropping dead on the job.”

While retail shareholders are fully exposed to the risk of reduced payouts and tumbling share prices, general partners had the distributions to sweeten the stock losses. It is not uncommon for a general partner to get about 50 cents in “incentive distribution rights” on every new dollar the company pays out, while typically owning just 2 percent of the equity.

Defenders of the payments say they offer incentives for the general partner to boost dividends for regular investors.

“The incentive distribution rights do align the goals of the general partner and the limited partners, which is to grow the business, grow the cash flow of the business per share and then grow the distribution per share,” said Quinn Kiley, who manages several MLP funds at Advisory Research Inc. “That’s good for everybody.”

But critics say such set up could lead to transactions that favor general partners while producing little value for regular investors. (Graphic: tmsnrt.rs/1O193HT)

Warren, for example, recently took part in a controversial preferred share offering that effectively protected his and other top shareholders’ distributions, but not the payouts to other unitholders.

And whereas the value of his stake in Energy Transfer Equity has shrunk by nearly $4 billion over the last year, Warren has received more than $680 million over the last five years in distributions from the company, which oversees three MLPs - Energy Transfer Partners, Sunoco Logistics and Sunoco Inc.

“The general partner owns a small fraction of this business and as result of the IDR takes out a significantly higher percentage of the business’ profits and cash flows. To me, it’s wrong,” said Kevin Kaiser, an analyst for research firm Hedgeye, who has criticized MLPs since 2013.

COMPLEX CREATURES

MLPs often have complex capital and ownership structures that can baffle even professional investors. Yet the vast majority of investors are individuals, who piled into pipeline MLPs looking for steady and reliable sources of income.

Nelson said that he bought into MLPs in 2013 following the advice of his broker, who told him that his portfolio was well diversified and low risk, even as over 90 percent of his retirement savings were in the energy-focused partnerships. “I never got any explanation about master limited partnerships,” he said.

Nelson has filed an arbitration claim against his broker with the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator, asking for damages of around $250,000.

Moloney Securities– the Missouri-based firm with nearly 150 brokers that advised Nelson - declined to comment because of the ongoing nature of the claim.

There are no publicly available records of such claims, but Nelson is not alone.

Craig and Janet Moore, retirees living in Kansas City, say they have lost more than $200,000 in master limited partnerships.

They sent a letter asking for restitution from their financial planner at Merrill Lynch, who they say put around two-thirds of their portfolio in the partnerships, without explaining their nature. They are still considering an arbitration claim, according to their lawyer.

Bank of America Merrill Lynch declined to comment on the couple’s complaint. The firm denied the request for compensation, according to documents filed with FINRA.

Since the stocks have dropped, the Moores have sold one of their two cars and Craig has sought medical advice for depression.

“It’s been our goal to leave what we started out with for our kids. To see that gradually slipping away month after month, it takes its toll on you,” Janet Moore said.