Energy Transfer Partners (ticker: ETP) and Regency Energy Partners (ticker: RGP) announced plans for a definitive merger in a joint press release issued on January 26, 2015. The proposal consists of a unit-for-unit transaction with an implied value of approximately $18 billion, including the assumption of $6.8 billion in debt from RGP. Both Master Limited Partnerships (MLPs) are among the ten largest companies based on enterprise value in EnerCom’s MLP Scorecard. The combined entity will be the second-largest MLP company in the industry, trailing only Enterprise Products Partners (ticker: EPD).
Energy Transfer Equity (ticker: ETE) owns the general partner and 100% of incentive distribution rights of both ETP and RGP. Per terms of the transaction, RGP shareholders are in line to receive 0.4066 units of ETP in addition to a cash payment of $0.32 per share, implying an all-in price of $26.89 per RGP share (13% premium to its last trading price on January 23, 2015). ETE plans on reducing incentive distributions by $320 million over the next five years, with $80 million occurring in the first year and $60 million occurring in each of the subsequent four.
The transaction is expected to close in Q2’15 and is anticipated to have no impact on credit ratings. The last major deal involving ETP was in April 2014, when the $1.8 billion acquisition of Susser Holdings was announced. Susser then became Sunoco Logistics Partners (ticker: SXL) and its incentive distribution rights are fully held by ETP. Regency was also active on the M&A front in 2014, acquiring PVR Partners for $5.6 billion in stock on March 21.
|1/26/2015||Energy Transfer Partners||Regency Energy Partners||
|1/22/2015||Kinder Morgan||Hiland Partners||
|12/8/2014||Whiting Petroleum||Kodiak Oil & Gas||
|11/12/2014||Enterprise Products Partners||Oiltanking Partners||
|8/10/2014||Kinder Morgan||Three KMI Subsidiaries||
Mergers Heating Up
Surprisingly, the $18 billion deal is only the third-largest acquisition in the oil and gas industry since August 2014, and all have involved companies outside of the E&P realm. ETP’s announcement comes just days after Kinder Morgan (ticker: KMI) spent $3.0 billion to land a midstream position in the Bakken. The Bakken’s rig count is at a three-year low and per-barrel prices are below $30, according to the Plains Marketing’s crude price bulletin for January 23.
Many industry veterans and analysts are expecting an uptick in M&A due to the commodity swing, with falling prices having a major effect on the debt to market cap percentages of E&Ps. In EnerCom’s E&P Weekly, the stock price of its 87 listed companies has declined by a median of 36% this year. The median debt to market cap ratio of 88 companies in EnerCom’s latest E&P Weekly is 78% – more than double the ratio of 35% for the week ended August 1. The amount of companies with debt levels exceeding its market capitalization has increased to 38 from 16.
Some industry experts, such as Tom Petrie, Chairman of Petrie Partners, believe the market is more prepared for the latest price drop bout. “This isn’t like the mid-80s, where half of the consolidations that occurred were mergers and the other half were bankruptcies,” he said in a December interview with Bloomberg. “This time around, I see the amount of forced reorganization being around 10% to 15%.”
Mr. Petrie expressed his view on the global commodity situation in the first installment of EnerCom’s “Top Minds in the Business” feature, which premiered last week.
How Do the Companies Measure Up?
The combined MLPs will consist of approximately 71,000 miles of pipelines and more than 3 Bcf/d of takeaway capacity in the Appalachia region. The respective companies have built a huge network, but the costs associated with running the networks are high in relation to the 56 “Midstream & Other” entities on EnerCom’s MLP Weekly. RGP’s capital intensity (defined as the amount of investment required to produce $1 in EBITDA) is 208% in the Weekly for the period ended January 23 – ranking 49th out of all qualifying MLPs. The capital intensity for ETP and ETE is 98% and 106%, respectively, which is still above the industry median of 82%.
“In light of the current volatility in commodity prices and the changes in the capital markets, it became apparent over the last several months that Regency needed more scale and diversification, along with an investment grade balance sheet, to continue its growth,” said Mike Bradley, Regency’s Chief Executive Officer, in the company release. “The merger will also allow Regency and ETP to consolidate our complementary midstream operations in the Permian and West Texas areas. The ability to bring those operations together under one roof is expected to create tremendous value for the unitholders of the combined partnerships.”
All three companies increased distribution simultaneously with the merger announcement. ETP has increased distribution for six straight quarters. In the company’s Q3’14 conference call, Martin Salinas, Chief Executive Officer of ETP, said “We continue to see strong distributable cash flows from our diversified portfolio of assets as we exit 2014, and we believe we’re well-positioned to see our distributable cash flow continue to grow in 2015 and beyond.”
Baird Energy upgraded ETP following an Analyst Day in December, saying ETE is still the preferable share to own of the group. The note reads: “January tends to be the best performing month for MLPs historically (Alerian MLP Index +4.7% vs. all other months +0.5% on average since 1996). We would be net long infrastructure-oriented MLPs such as those in the ET family headed into 1Q15.”
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