Western Gas announces drop-down, simplification

Western Gas Partners (ticker: WES) announced several moves today, expanding its holdings and simplifying its corporate structure.

Western Gas Partners will acquire $4 billion in midstream assets from its parent Anadarko (ticker: APC), all the company’s remaining midstream assets. These assets include oil and water gathering pipelines in the Delaware, including associated treatment and disposal facilities, plus 50% shares in 325 MMcf/d of gas processing in the basin.

Western Gas will also acquire Anadarko’s oil gathering pipelines and a 290 MMcf/d processing plant in the DJ. Finally, Anadarko is divesting its interests in three pipelines, only one of which is controlling. Western gas projects the assets will produce about $420 million in EBITDA in 2019, meaning the deal was priced at 9.5x EBITDA.

Anadarko Divests Midstream Assets for $4 Billion

The payment for these assets will be an even split between cash and stock, with Anadarko receiving $2.0075 billion of each. Western Gas will fund the cash portion of the deal through debt, as the company has received a $2 billion term loan.

These proceeds will give Anadarko significant room to maneuver, whether it decides to spend more on development or return capital to shareholders. Current investor sentiment and past statements suggest Anadarko will primarily return this cash through share repurchases. Analysts at Tudor Pickering forecast Anadarko will announce another big repurchase program, with 10% of the company’s market cap being purchased.

Simplification will leave Anadarko as 55.5% owner

Western Gas has simultaneously announced a simplification to its corporate structure, with Western Gas Equity Partners (ticker: WGP) acquiring Western Gas Partners. WES holders will receive 1.525 WGP units, representing a 7.6% premium to WES’s closing price yesterday.

Anadarko Divests Midstream Assets for $4 Billion

Like many MLP companies, Western gas has a complicated corporate structure. This deal will simplify the structure somewhat, leaving only WGP as a publicly traded entity. Anadarko will own about 55.5% of the resultant company.

Anadarko Divests Midstream Assets for $4 Billion

Many MLPs have recently announced changes to their corporate structure, eliminating subsidiaries or transitioning to C-corporations. Both standalone and E&P-sponsored MLPs have been simplifying over the past year. Western Gas’s deal is somewhat unusual, though, as both WES and WGP are MLPs. Both deals, the drop-down and the simplification, are expected to close in Q1 2019.

Western Gas CEO Benjamin Fink commented, “The transactions we announced today will transform the Western Gas franchise, and put it on a new, stronger footing for continued success in the future. We have executed these transactions at a time when we are realizing strong organic cash flow growth and expanding distribution coverage. This step serves to strengthen our already considerable competitive advantages via a lower cost of equity and a clean, simple capital structure. We are delighted to have been able to structure a transaction in which we expect all unitholders will realize annual distribution growth in 2019, as well as an enhanced long-term distribution growth profile.”


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