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NGL-Focused JV Targets 'Shift in the Market'

Producers' increasing interest in liquids-rich gas plays that has made it necessary for midstream service providers to offer natural gas liquids (NGL) capabilities is what is suggested by this week's pairing of Energy Transfer Partners LP (ETP) and Regency Energy Partners LP in a joint venture (JV) to do just that.

Late Tuesday the partners said they are acquiring NGL storage, fractionation and transportation assets with the acquisition of LDH Energy Asset Holdings LLC from Louis Dreyfus Highbridge Energy LLC for $1.925 billion in cash (see Daily GPI, March 23).

Both partnerships gain an NGL platform, strengthening their service offerings to liquids-focused producers, executives from each said during separate conference calls Wednesday.

"It's an accretive project standalone," said ETP CEO Kelcy Warren. "The most important thing...if you look at our customers, they're all moving to oily plays. Everybody that has a choice to drill a gas well versus an oil well is drilling an oil well. Second to that, if you don't have a choice, then you're certainly trying to drill the [gas] wells that are more saturated with liquids. Consequently, we're seeing that our customers are requiring services that up to now Energy Transfer Partners has not been a very large participant in that service.

"And that's just not acceptable; we had to provide this."

For his part, Regency CEO Mike Bradley told financial analysts that the acquired assets will "allow both companies to offer comprehensive NGL solutions to natural gas producers and combined with our existing natural gas infrastructure will allow us to provide a full array of midstream services."

Bradley said the propane-to-crude price ratio has dropped from 80% to 65% over the last decade and the ethane-to-crude radio has declined even further, falling from more than 50% to about 28%.

"This decoupling of the light-end NGLs from crude and heavier NGL products has given the lighter NGLs a significant cost advantage as a feedstock for the petchem producers," he said. "Domestic NGL demand is expected to remain strong as a result of low relative feedstock cost. Driven by increased processing efficiencies as well as a shift to more liquids-rich plays, domestic NGL production has increased by approximately 16% over the last five years and is expected to increase for the foreseeable future, creating the need for additional NGL infrastructure.

"We believe this acquisition provides us with the platform from which to take advantage of the fundamental shift in the market."

Wells Fargo Securities analysts in a note Wednesday said they agreed with the rationale of the strategy. "We believe this is a positive strategic step for the partnerships as (1) it creates a new NGL platform for future growth in an area with strong underlying fundamentals and (2) diversifies cash flows beyond natural gas and processing," they said.

An ETP executive allowed that there likely were several bidders for the assets. The Wells Fargo analysts said it's likely that the partners paid "a full price for the assets" given their strategic nature, but it was worth it.

The assets are primarily fee-based, which protects the partners from commodity price fluctuations, executives said. They are:

Kelcy said the West Texas Pipeline would be a good candidate for future expansion depending upon producer requirements for capacity out of West Texas. He said all of the pipeline's current contracts are priced below market, providing opportunities to grow revenue as contracts roll off.

"The economics could improve over time with organic growth opportunities, in our view, based on the assets' attractive footprint, producers' focus on liquids-rich drilling, the growing demand for fractionation capacity, and bottlenecks in current liquids takeaway capacity from West Texas," the Wells Fargo analysts said.

At closing, ETP will contribute $1.35 billion in exchange for a 70% ownership interest in the JV, while Regency will contribute $578 million in exchange for a 30% interest. The JV will be managed by a two-person board, with ETP and Regency each appointing one director. ETP will operate the assets with the existing LDH employees.

Regency said Wednesday it planned to raise $204 million of common equity and will issue about 8.5 million common units to funds managed by each of Kayne Anderson Capital Advisors LP, Tortoise Capital Advisors LLC and Fiduciary Asset Management Inc. Some of the proceeds will fund the partnership's stake in the new JV.

LDH CEO William Reed said the JV partners can count on his company to be a customer. "We hope to develop a long-standing relationship with ETP, Regency and ETP-Regency Midstream in a number of different existing and future opportunities, including serving as an important customer of ETP-Regency Midstream in connection with midstream assets."

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