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What you should know about Regency’s acquisition of Eagle Rock’s midstream operations

Ingrid Pan, CFA

Regency Energy makes two more big purchases (Part 2 of 5)

(Continued from Part 1)

On December 23, 2013, Regency Energy (RGP) announced that it would purchase Eagle Rock’s (EROC) midstream assets for ~$1.3 billion. Eagle Rock is a master limited partnership with both upstream (oil and gas production) and midstream (hydrocarbon transport, processing, and logistics) businesses. After this transaction, Eagle Rock will have divested itself from its midstream operations and will focused on upstream operations. The transaction is expected to close in 2Q14, as long as customary closing conditions are met, such as antitrust approval.

Financing of the deal

Regency will fund the acquisition of Eagle Rock’s midstream assets through the issuance of $200 million of common equity to Eagle Rock and $400 million of common equity to Energy Transfer Equity, which owns Regency Energy’s general partner (which effectively controls the management of Regency, see The Market Realist guide to master limited partnerships for more information on general partners), and over 26 million units of Regency equity already. Because Eagle Rock is receiving some Regency equity for the transaction, it will still have some exposure to the midstream sector. However, Eagle Rock will be able to sell its Regency stock whenever it wishes. Eagle Rock management stated that there is no lockup period on its Regency stock.

Additionally, Regency will exchange up to $550 million of senior notes in exchange for Eagle Rock’s outstanding senior notes (debt for debt exchange) and the balance will be paid for with Regency’s revolving credit facility (also debt). Management commented that given the financing structure of the transaction, the acquisition would be balance sheet neutral. That is, it wouldn’t cause Regency Energy to be more levered — or in simple terms it would not cause Regency to take on more debt relative to its incremental cash flow from the new assets.

How Eagle Rock’s assets fit into Regency’s existing footprint

Regency management noted that Eagle Rock’s Texas Panhandle assets are complementary to its existing business and therefore promise significant synergies as Regency already has significant assets in the Texas Panhandle area. The Eagle Rock assets will also provide Regency with significant assets in East Texas. Management expects that roughly 80% of gross margin will come from the Texas Panhandle assets, and 20% of gross margin will come from the East Texas assets.

Continue to the next section to see what Regency management said about the Eagle Ford assets and one potential risk to Regency from the acquisition.

Continue to Part 3

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