Sometimes paying ahead really does save money.
WPX Energy Inc. (NYSE: WPX) signed an agreement to buy out its remaining transportation obligations from its former Piceance Basin operations for about $239 million, the company said May 25.
Buyer Citadel NGPE LLC will take on the obligations, which erase $164 million in letters of credit and associated interest. WPX also frees itself from $400 million in demand obligations that stretch through 2032.
Upon closing, WPX will release all of its Piceance-related firm transportation capacity across four interstate pipeline systems to Citadel.
Tudor, Pickering, Holt & Co. (TPH) called the transaction a “good use of capital” that came in under its estimates of $240 million to $250 million. WPX will save roughly $70 million on an annualized basis beginning in 2016.
“A smaller Powder River Basin transportation obligation remains totaling about $20 million to 25 million,” TPH said. “The deal is positive from a balance sheet perspective as year-end 2017 leverage at strip falls to an estimated 3.8x from 4.1x prior to the deal, excluding the impact of interest savings.”
WPX appears to be near the end of its road to transformation. It began in July with the purchase of Permian Basin acreage for $2.75 billion. Since then, WPX has divested a number of assets, such as the Piceance and its San Juan Basin gathering system.
At the close of its deal with Citadel, WPX expects to have about $1.3 billion in liquidity, made up mainly of $1.025 billion in undrawn revolver capacity as well as cash. WPX is using cash on-hand to fund the agreement.
“This is another strategic step in the transformation of our company and the simplification of our story,” said Rick Muncrief, WPX president and CEO. “It strengthens our liquidity, increases cash flow in subsequent years, frees up future revolver capacity and completes our full exit from the Piceance Basin.”
Citadel said the deal follows the firm's launch of a natural gas business in 2014.
“We see natural gas transportation as a foundation for the growth of our physical business and are excited to be expanding in this market," said Mark Stainton, head of commodities at Citadel. "This transaction builds on our track-record of success in commodities and commitment to providing our investors with access to attractive opportunities in the energy space."
The parties expect to close the transaction in the third quarter.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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