Vanguard Natural Resources LLC (VNR) is continuing its march to take over upstream MLP companies, most recently saying it would merge with Eagle Rock Energy Partners LP (EROC) for $614 million.
In April, Houston’s Vanguard and LRR Energy LP (LRE) announced a similar deal worth $539 million. In both transactions, Vanguard is footing the acquisition costs through the use of common units.
In the Eagle Rock deal, Vanguard said it will pay $474 million in Vanguard common units and assume Eagle Rock's net debt of $140 million as of March 31. The purchase price is a 24% premium to Eagle Rock’s closing price on May 21.
In the LRR merger, Vanguard ceded $251 million in a tax-free exchange of Vanguard common units and assumes LRR's net debt of $288 million is the transaction is approved by unitholders. LRR’s asking price was a 13% premium to its closing price as of April 20.
Analysts such as Ethan Bellamy, Baird Energy, have raised concerns about the viability of the upstream MLP business model, especially given the ups and downs of commodity prices.
However, Eagle Rock's oil and gas production is hedged 80% in 2015 and 70% in 2016. Vanguard expects neutral cash flow from the deal in 2015 and for it to be accretive beyond 2016.
Eagle Rock unitholders will receive consideration valued at $3.05 per Eagle Rock common unit based on Vanguard's closing price as of May 21. Vanguard and Eagle Rock expect the transaction to close in the third quarter of 2015. The merger is subject to customary closing conditions, including the approval by Vanguard and Eagle Rock unitholders.
Scott W. Smith, Vanguard president and CEO, said Eagle Rock’s assets are attractive bolt-ons to the company’s Midcontinent, Permian Basin and Gulf Coast Basin operations.
“Eagle Rock has a meaningful position in the Scoop and Stack plays, which will provide attractive drilling opportunities for the next several years,” Smith said. “Considering the previously announced merger agreement with LRR Energy, we believe that all three companies' unitholders will benefit from a larger, more diversified entity with lower financial leverage and strong positions in several key U.S. basins. The all-unit nature of the transaction will allow Vanguard, LRR Energy and Eagle Rock unitholders to jointly reap the value growth in an improving commodity price cycle.”
Highlights:
- Eagle Rock's long-life, low-decline, mature assets are well-suited for Vanguard's upstream MLP model;
- Eagle Rock's low leverage will positively impact Vanguard's debt metrics and credit profile;
- Balanced reserves mix of 53% natural gas, 21% oil and 26% NGL;
- Assets add scale in Vanguard's existing East Texas and Permian basins and establishes a new operating platform in the Anadarko Basin;
- Significant potential for cost savings through G&A synergies;
- Opportunity to attract and retain experienced personnel from Eagle Rock to expand Vanguard's employee base;
- First-quarter 2015 production of about 79.7 million cubic feet equivalent per day (MMcfe/d) would increase Vanguard's production by 20%;
- Proved reserves, as of Dec. 31, of about 318 Bcfe increases Vanguard's estimated proved reserves by 16%;
- Adds 1,778 producing wells and about 202,632 net acres.
Wells Fargo Securities was exclusive financial adviser and Paul Hastings LLP was legal counsel to Vanguard. Evercore Group LLC was exclusive financial adviser and Vinson & Elkins LLP was legal counsel to Eagle Rock.
Since its IPO in 2007 through the end of 2014, Vanguard has made 23 acquisitions valued at $4.2 billion.
Vanguard's assets consist primarily of producing and non-producing oil and natural gas reserves located in the Green River, Wind River and Powder River basins in Wyoming; the Arkoma Basin in Arkansas and Oklahoma; the Permian Basin in West Texas and New Mexico; the Piceance Basin in Colorado; the Gulf Coast Basin in Texas, Louisiana and Mississippi; and the Williston Basin in North Dakota and Montana.
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