Penn Virginia Resource Partners LP (PVR) is buying Chief Gathering LLC for $1 billion. Chief Gathering serves northeastern Pennsylvania Marcellus Shale producers and is a sister company to producer Chief Oil & Gas LLC.
The addition of the Chief Gathering assets "will result in a major expansion of PVR's pipeline systems in the gas-rich Marcellus Shale," the company said last week. PVR, which is acquiring the company from Chief E&D Holdings LP, said it expects to finance the purchase through a combination of equity and debt. The transaction is expected to close in the second quarter, subject to regulatory clearances and other conditions.
"The acquisition of the Chief Gathering systems is a transformational transaction for PVR," said William H. Shea Jr., CEO of PVR's general partner. "These assets, together with our Lycoming and Wyoming county gathering assets, position us well to capture significant midstream opportunities in six of the most prolific counties in the northeastern area of the Marcellus Shale."
The move reflects a new reality in the energy patch: increasingly coal is out and natural gas is in. While discussing the deal with financial analysts during a conference call last Tuesday, Shea noted that PVR's coal business is shrinking and midstream gas -- particularly that part of the business supported by fee-based contracts -- is growing. While PVR's coal business has been "a steady performer...it's in difficult environment and situation right now...It's going to be difficult if not impossible to grow in the coal business," Shea said. Last year the coal business contributed about 63% of PVR's earnings with the midstream business making up the rest. Next year, following completion of the Chief Gathering acquisition, coal's contribution is expected to be 25% while midstream contributes 75%.
The Chief Gathering acquisition is expected to generate capital savings for PVR or more than $25 million and raise annual revenues by more than $25 million, the company said. The gathering assets include six gathering systems serving more than 300,000 dedicated acres in Bradford, Lycoming, Sullivan, Susquehanna, Wyoming and Greene counties in Pennsylvania and Preston County in West Virginia. Chief Gathering is constructing a 750 MMcf/d trunkline, expected to be in service in the third quarter, extending from northern Wyoming County to Luzerne County with a connection to Transco's interstate pipeline. PVR owns two gathering systems in Lycoming and Wyoming counties, with a third system in early development in Susquehanna County.
"On the upstream front, Chief [Oil&Gas] owns acreage in northeast Pennsylvania, which will now be gathered by PVR, and we plan to continue to drill and increase production in this prolific area of the Marcellus," said Chief Oil & Gas CEO Trevor Rees-Jones.
All of the gathering, compression, and dehydration services for the Chief Gathering systems are provided under fee-based agreements with active Marcellus producers including Chesapeake Energy Corp., Anadarko Petroleum Corp., Statoil, Mitsui, Exco/BG Group, ExxonMobil Corp.'s XTO Energy Inc. subsidiary, Chief, Enerplus and Chevron Corp.. As of February volumes on the Chief Gathering systems were approximately 235 MMcf/d and volumes on PVR's Marcellus systems were approximately 210 MMcf/d, the company said. The new Wyoming County trunkline has 15-year firm transportation volume commitments of 255 MMcf/d for 2012, increasing to 355 MMcf/d in 2013.
"We believe that there are substantial operating synergies and capital cost savings to be realized because of the proximity of the PVR and Chief Gathering systems, and the connectivity to both the Transco and Tennessee interstate pipelines," Shea said. "We expect to capture additional volumes from producers as a result of these synergies and delivery options."
Chief E&D and and Riverstone Holdings LLC will be "significant owners" of PVR units following closure of the deal. The purchase price of $1 billion is to be paid in a combination of cash and the issuance to Chief E&D of $200 million in a new class of PVR limited partner interests (special units). The special units are similar to PVR common units except that they will not pay or accrue distributions until they automatically convert to common units, on a one-for-one basis once the special units have not received six consecutive quarterly distributions following issuance.
"We believe that this acquisition clearly solidifies PVR as a leading midstream company with significant assets in both the Marcellus Shale and the Granite Wash, two of the lowest cost natural gas production areas in the United States," Shea said.
Thanks to declining gas prices, the Marcellus Shale -- much of which is a dry gas play -- has seen a 4% decline in oil and gas rigs from one month ago, according to price indices and rig count data from NGI's Shale Daily and Smith Bits. NGI's Southwest Pennsylvania Marcellus Spot Price and Northeast Pennsylvania Marcellus Spot Price have fallen from averaging $2.91 and $2.46/MMBtu, respectively, on Jan. 3, 2012, to $2.09 and $2.06/MMBtu on April 9, 2012. Similarly, according to NGI's Shale Daily Unconventional Rig Count, oil and gas rigs in the play have dropped from 172 to 153 over that same period.
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