Regency Energy Partners LP (RGP) said that it is spending $5.6 billion to acquire rival natural gas pipeline operator PVR Partners LP (PVR) to gain a strategic position in two prolific shale fields. The deal includes Regency assuming PVR’s net debt of $1.8 billion.
Under the terms of the agreement, PVR unitholders (common units, Class B units and special units) will receive 1.02 common units of Regency for each PVR unit. PVR unitholders will also receive a one-time cash payment estimated to be an aggregate of $40 million. The value to PVR unitholders is priced at $28.68, the closing price of Regency on Wednesday, representing a 25.7-percent premium to PVR’s closing price of $22.81 on Wednesday.
The transaction has been approved by the boards of both companies and is expected to close in the first quarter of 2014. The merged company will still be called Regency.
With the acquisition, Dallas, Texas-based Regency will have a strong presence in the Marcellus and Utica shales and will create a leading gas gathering and processing platform with a scaled presence across North America's premier high-growth unconventional oil and gas plays in Appalachia, West Texas, South Texas, the Mid-Continent and North Louisiana, according to the companies.
“These are tremendously complementary businesses, and as a result, we expect the increased footprint and scale to create significant synergies and provide substantial organic growth opportunities that will continue to support our goal of increasing distributions and creating unitholder value,” said Michael J. Bradley, president and chief executive officer of Regency, in a statement today.
PVR owns and operates a network of natural gas midstream pipelines and processing plants, and owns and manages coal and natural resource properties. The company’s midstream assets are mostly located in Texas, Oklahoma and Pennsylvania. Their coal and natural resources are in the Appalachian, Illinois and San Juan basins and leased to operators in exchange for royalties.
The massive Appalachian Basin crosses New York, Pennsylvania, eastern Ohio, West Virginia, western Maryland, eastern Kentucky, western Virginia, eastern Tennessee, northwestern Georgia, and northeastern Alabama. The Illinois Basin spans Illinois, Indiana, western Kentucky and the northern tip of Tennessee. The San Juan Basin encompassing much of northwestern New Mexico, southwest Colorado, and parts of Arizona and Utah.
Regency’s existing footprint is in the Permian Basin, South Texas (Eagle Ford shale), Texas and Oklahoma (Granite Wash) and North Louisiana (Haynesville Shale and Cotton Valley formation).
The combination is expected to be slightly dilutive to 2014 discounted cash flow, but is not expected to affect anticipated cash distribution growth in 2014. Because of scale, strength of balance sheet and diversification, Regency expects the merger to provide substantial DCF and EBITDA growth in the future.
In recent years, the nation’s energy output has been soaring, stoked by shale formations of oil and natural gas. The Wall Street Journal reported last week that the U.S. is on pace to pass Russia as the largest producer of oil and gas combined in 2013 (and it may have happened already, according to WSJ). In at least the near term, this bodes well for the new Regency as U.S. imports of oil and gas continue to decline as more is produced domestically, and could become a large exporter of natural gas in the future. However, some industry experts contest that the surge in U.S. shale production is a bubble that will likely burst, perhaps by the end of the decade.
Shares of RGP have dropped more than 7 percent on the acquisition news to $25.82 halfway through Thursday’s trading session. Shares of PVR jumped ahead 13 percent to $25.75.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer