Regency Energy Partners LP, a pipeline owner controlled by Energy Transfer Equity LP, agreed to buy two pipeline units for about $1 billion to expand in Texas, where crude production has surged, Regency said Dec. 23.

Regency will acquire the midstream assets of Eagle Rock Energy Partners LP for $200 million in stock and $520 million in cash, the company said. Separately, Regency said it would pay $290 million for assets belonging to closely-held Hoover Energy Partners LP.

Regency is extending its operations in Texas, where crude oil production has more than doubled since 2009 as companies apply shale-drilling techniques to previously overlooked deposits. Accompanying the oil are natural gas and related liquids that need to be processed by so-called midstream operations.

The Eagle Rock deal will augment Regency’s $3.88 billion acquisition of PVR Partners LP in October, CEO Mike Bradley said. That deal boosted Regency’s operations in the Marcellus shale, the Utica shale in Ohio and the Granite Wash fields in Texas and Oklahoma.

“Our expanded footprint will strengthen Regency’s position as a midstream provider in the Mid-Continent region,” Bradley added.

Regency jumped as much as 5.3 percent, the most on an intraday basis since August 2011, to trade at $25.43 in New York. The units are up 17 percent this year.

Gathering Lines

Regency is getting 8,100 miles of gathering lines in the Texas Panhandle, East Texas and South Texas from Eagle Rock, as well as plants capable of processing 800 million cubic feet per day (MMcf/d) of natural gas. Hoover gathers and treats oil, gas and water in the southern portion of the Permian Basin.

“It’s a fair price for both parties,” said Ethan Bellamy, a Denver-based analyst for Robert W. Baird & Co. who rates units of Regency and Energy Transfer Equity at hold, and owns none. Regency is getting the Eagle Rock midstream operations at a slight discount, probably because Eagle Rock needed cash to lower its debt load, he said.

Eagle Rock had $1.2 billion of debt as of Sept. 30, which crimped investments in oil and gas production, CEO Joe Mills said on a conference call. The partnership expects to buy oil and gas properties next year, he said.

Assume Debt

The Eagle Rock deal is expected to close in the first half. Regency intends to assume $550 million of Eagle Rock debt as part of the transaction.

Separately, Energy Transfer Equity said it will buy $400 million of Regency common units at market price to help finance the Eagle Rock deal. Energy Transfer also announced a two-for-one stock split and $1 billion buyback program, according to a statement.

Evercore Group, LLC
and Citigroup Inc. advised Eagle Rock. Barclays Plc’s investment banking unit advised Regency on the Eagle Rock transaction.