Why the recent CHK acquisition is positive for Exterran Partners

Market Realist

Why Chesapeake Energy's asset sale is positive for all parties (Part 4 of 4)

(Continued from Part 3)

Exterran Partners

On February 28, 2014, Exterran Partners LP (EXLP) announced that it would acquire certain natural gas compression assets from Chesapeake Energy (CHK) for $360 million. Simultaneously, Access Midstream Partners (ACMP) announced that it would purchase 103 compression units with 200,000 horsepower of capacity for $160 million from Chesapeake Energy. These companies affect the Oppenheimer SteelPath MLP Funds Trust (AMLP) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

This should be an incremental positive for EXLP. Exterran management also noted that the transaction should be accretive to distributable cash flow and should also help EXLP to transition towards operating without the benefit of EXH’s cost caps. Management noted that although it expects higher DCF from the acquisition, it doesn’t expect to increase its distribution per unit. Management said, “We will continue to monitor our distribution strategy as we integrate this transaction and implement our North America field initiatives.”

If we assume that these assets were purchased at an 8x forward EBITDA multiple (the multiple disclosed by Access Midstream regarding its acquisition), these assets should generate approximately $45 million of EBITDA in 2014. To provide some context, EXLP’s generated $238 million of EBITDA in 2013. Accretive EBITDA growth is a positive for the company.

Aside from being accretive to distributable cash flow, EXLP’s acquisition of compression assets from CHK is also positive in that it represents a step away from relying on its parent for growth. This is the first major acquisition that EXLP has executed that does not involve assets from EXH. Previously, all major acquisitions executed by EXLP were for assets from EXH (in the MLP world, the acquisition of a drop-down from the general partner/parent company is commonly called a “drop-down”). However, the set of available assets that EXH can sell to EXLP has is limited and finite, and has been decreasing as EXH has dropped down assets to EXLP over the years. That EXLP has now entered into an agreement to acquire assets from CHK represents a precedent that the company can identify and execute on third party acquisition opportunities.

For more on Exterran Partners and the natural gas compression industry, please see the Market Realist series Exterran Partners overview: Recent success and key trends.

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