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Essential takeaway points from Regency’s purchase of PVR Partners

Ingrid Pan, CFA

Regency Energy buys PVR Partners (Part 7 of 7)

(Continued from Part 6)

The acquisition and the MLP landscape

Regency’s recent announcement that it will purchase PVR Partners reconfirms a few points that have already characterized the master limited partnership (or MLP) landscape.

1. North American gas production is here to stay

Aside from its coal royalties business, PVR’s assets are substantially focused on natural gas midstream operations. Regency’s decision to purchase them affirms its confidence in the North American natural gas business, despite currently depressed prices of under $4.00 per MMBtu.

2. The Marcellus is considered a premiere asset, and potential upside resides in the nearby Utica

The primary selling point of PVR was likely its exposure to the Marcellus Shale, which is widely considered to be the premiere natural gas asset in the US, and was a key component missing from Regency’s portfolio. Plus, PVR’s assets had upside to the nearby Utica Shale, which is in the early stages of development but is showing promise (see Chesapeake Energy and its former CEO suggest huge Utica potential). That Regency paid a 19x LTM EBITDA (earnings before interest, tax, depreciation, and amortization) multiple for PVR and that it’s willing to accept some dilution in the near term means it has conviction that the growth potential for these assets is significant.

3. Acquisition activity in midstream continues to be strong, with a focus on smaller companies operating in “hot” plays

Substantial M&A (mergers and acquisitions) activity in the master limited partnership sector has been ongoing. From a corporate-level perspective, smaller companies with substantial exposure to high growth areas look to be hot acquisition targets. For example, Regency bought PVR for its Marcellus and Utica exposure. On the same day, Crestwood Midstream announced it would buy Arrow Midstream, which had assets concentrated in the bustling Bakken play. Earlier this year, Kinder Morgan bought Copano Energy, which had substantial assets in the rapidly developing Eagle Ford play. Analysts view these acquisitions as an attractive way to achieve growth and gain a foothold in important shale plays.

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