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Takeaways from Regency Energy’s recent acquisition announcements

Ingrid Pan, CFA

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

(Continued from Part 4)

Regency Energy (RGP) recently announced ~$1.6 billion in acquisitions, with ~$1.3 billion to purchase Eagle Rock’s (EROC) midstream assets in the Texas Panhandle and East Texas, and ~$290 million used to purchase certain West Texas assets from Hoover Energy. Prior sections of this series discuss these transactions in detail, and below are the essential takeaways.

Strong anticipated distribution growth

Regency believes both of these transactions will be accretive to distributable cash flow in 2014, inclusive of some but not all anticipated benefits from synergies. Management has recommended to the board to grow distributions at a rate of 6% to 8% for full-year 2014. In comparison, last quarter’s (3Q13) distribution of $0.47 per unit grew 2% year-over-year from the company’s 3Q12 distribution. The distributable cash flow guidance is a positive.

More scale, synergies, and areas of operation

Regency anticipates being able to realize synergies from both acquisitions. Note that Regency already had substantial assets in the Texas Panhandle, where most of the Eagle Rock acquisition assets are located, and substantial assets in West Texas, where the Hoover Energy assets are located. With the overlap in geographical footprint, Regency may be able to realize some cost savings and efficiencies and potentially better negotiating power. Plus, the East Texas operations that come with the Eagle Rock assets add some incremental diversification benefit to Regency.

Balanced financing between debt and equity

Another positive is that RGP has minimized its dependence upon the capital markets to finance these acquisitions. The Eagle Rock acquisition will be funded through equity issued to Eagle Rock and to Regency’s general partner, Energy Transfer Equity, and the debt portion of the consideration will be completed through a like-kind exchange of Regency senior notes for Eagle Rock senior notes, with the balance funded with Regency’s revolver. Also, the Hoover acquisition will be funded with equity issued to Hoover and through Regency’s revolving credit facility.

Overall, the transactions were financed with a favorably balanced mix of debt and equity. Management noted, “Both transactions have been pre-funded and are structured to support Regency’s long-term target leverage ratio of 4.0x.” More debt could have meant more burdensome interest payments and a lower credit rating. More equity could have diluted the benefits of the transactions to unitholders.

Also, management noted that it doesn’t expect additional equity offerings in 2014, except through its ATM (at-the-market) program to fund organic growth, with estimated ATM equity issuance of ~$300 million. At-the-market equity offerings are designed to let companies slowly raise funds over time and are generally less disruptive to the markets than traditional larger secondary offerings.

This transaction affirms continued optimism towards domestic midstream opportunities

This transaction also affirms that given growing oil and gas production activity in the U.S., domestic midstream companies remain on the lookout for attractive growth opportunities and remain ready to complete acquisitions. Already this year, Regency has announced several major transactions, including this recent one.

Despite the added commodity risk that the Eagle Rock assets will bestow on Regency (see Part 3 of this series, How Regency’s purchase of Eagle Rock’s assets could increase risk), this transaction looks to be positive for the company. The stock responded positively on the day, closing at $26.07 per unit on the day of the announcement, compared to $24.19 per unit from the prior day’s close.

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