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Deal Makes Eagle Rock a Pure Play; Regency Adds Plants, Pipe

Eagle Rock Energy Partners LP is transforming itself into a pure-play upstream master limited partnership (MLP) through the sale of its midstream business to Regency Energy Partners LP as it sees more opportunities for growth by exploiting and adding to its assets in the Midcontinent, Permian Basin, South and East Texas as well as in Alabama and Mississippi.

For its part, Regency Energy Partners is picking up midstream assets in the $1.3 billion deal that will complement those it is acquiring from PVR Resources in a previously announced transaction (see Shale Daily, Oct. 11). Regency Energy Partners said its presence in East and South Texas as well as the Texas Panhandle will benefit from further diversification. As if that weren't enough, the partnership on Monday announced a smaller transaction that will grow its presence in the Delaware Basin in West Texas.

During a conference call to discuss the midstream sale, Eagle Rock CEO Joe Mills said management has been considering the transformation of the partnership for some time.

"This does accomplish our state goal of simplifying and streamlining our partnership with a single business line," Mills said. "We know over the past couple of years we certainly have heard from our unitholders that our two lines of business tend to be confusing and probably blurs who we are and where we're going."

The sale sharpens the company's focus while improving cost structure by providing "substantial" reductions in general and administrative expenses. After closing, Eagle Rock's leverage ratio will decline from more than 5x to less than 1.7x, positioning it well to be an asset acquirer next year after having sat out the acquisition game during 2013.

"We believe there's more opportunities for growth in the upstream MLP space," Mills said. "Clearly there's a much larger variety of upstream assets that can be acquired from the majors or even large independents. Clearly we'll be very focused on growing our footprint both in the existing areas which we operate in, which would be the Midcontinent, the Arkoma, the Anadarko Basin, the Permian, East Texas and other areas.

"But equally important, we'll continue to grow our production base by continuing to drill with our measured drilling program focused on the high-return opportunities in our SCOOP play as well as the Golden Trend. We'll have much more significant dry powder and a more competitive cost of capital to pursue acquisitions."

In the Midcontinent, Eagle Rock is active in the Golden Trend Field, the SCOOP play, the Cana Shale, Verden Field, Mansfield Field and other fields in Texas, Oklahoma and Arkansas.

Permian operations are concentrated in fields located mainly in Ward, Pecos, and Crane counties, TX. These fields are located on the Central Basin Platform, which encompasses hundreds of individual fields with multiple productive intervals from the Yates through the Ellenburger formations, according to Eagle Rock.

The East/South Texas/Mississippi/Louisiana region includes the Aker, Birch, Edgewood, Eustace, Fruitvale, Ginger and Wesson fields in East Texas, the Jourdanton field in South Texas, and the Chicora W, High Road, and Stafford Springs fields in Mississippi. The partnership's southern Alabama region includes the Big Escambia Creek, Flomaton and Fanny Church fields in Escambia County, AL. The fields produce from either the Smackover or Norphlet formations.

Mills told analysts that management realizes the company needs to lengthen its reserve and production profile and intends to do so through focusing on acquisitions of long-lived, shallow decline assets. "We're hopeful that some time in 2014 we'll be able to make some accretive acquisitions that will bolster our distribution growth," he said.

Regency Energy Partners is getting midstream assets that include 8,100 miles of gathering pipeline and more than 800 MMcf/d of processing capacity among about 20 plants. Cash flows are supported by large, long-term acreage dedications. The combined system is expected to provide significant synergies, increase efficiencies on Regency's current system, and enhance services for its customers.

"This acquisition represents another attractive growth opportunity for Regency and is very strategic to our plans to increase our scale and expand our basin diversity in liquids-rich areas," said Regency CEO Mike Bradley. "When combined with the proposed acquisition of PVR Partners, our expanded footprint will strengthen Regency's position as a midstream provider in the Midcontinent region and provide additional growth opportunities."

Customers on the Eagle Rock systems include Anadarko Petroleum Corp., Apache, BP, Chesapeake Energy Corp., ExxonMobil Corp., Linn Energy, EOG Resources, Jones Energy and Halcon, according to Regency.

The majority of the Eagle Rock assets are in the Texas Panhandle. According to Regency, they are are in a core area and immediately expand its midstream position in the region where stacked plays are expected to provide producers with "significant drilling opportunities for many years" and the "single well economics in the area continue to be top-tier." The Panhandle system includes about 6,500 miles of gathering pipelines and about 550 MMcf/d of processing capacity.

"Eagle Rock's assets are very well positioned in the Texas Panhandle and are very complementary with the PVR assets the area," Bradley told analysts during a conference call Monday. "The combined footprint offers a range of attractive benefits and potential upside via operating synergies, additional commercial opportunities and enhanced service offerings to current customers. It also creates an expanded platform from which to pursue additional growth projects and additional operational efficiencies."

In East Texas assets being acquired overlie several attractive shale plays, including the Haynesville Shale, Austin Chalk, Tuscaloosa Marine Shale and Woodbine Shale. "These assets are positioned to capture additional volumes in East Texas with the infrastructure that is currently in place," Bradley said.

The acquisition is expected to be immediately accretive to Regency distributable cash flow per common unit and be accretive to distributable cash flow per common unit on a pro forma basis with the pending acquisition of PVR Partners. In light of the expected cash flow accretion from the Eagle Rock transaction, Regency management expects to recommend to its board of directors distribution increases that would represent a growth rate of 6-8% for full-year 2014.

The deal is expected to close in the second quarter and is subject to the approval of Eagle Rock unitholders, antitrust clearance and other customary conditions.

Regency expects to finance the acquisition by issuing $200 million of Regency common units to Eagle Rock, issuing $400 million of Regency common units to Energy Transfer Equity LP; and the assumption and like-kind exchange of up to $550 million of outstanding Eagle Rock senior notes into Regency senior notes. The remaining portion of the consideration will be funded from borrowings under Regency's revolving credit facility.

Separately on Monday, Regency Energy Partners said it would buy the midstream assets of Hoover Energy Partners LP in a deal worth $290 million. The assets are seen as a complement to Regency Energy Partners' existing footprint in the southern portion of the Delaware Basin. They also will expand its producer services to crude and water gathering.

Hoover midstream services include crude oil gathering, transportation and terminaling, condensate handling, natural gas gathering, treating, processing, and water gathering and disposal services. The Perry Ranch Station is a major destination for crude gathered by a customer in the region and is backed by a 20-year dedication. In addition, Hoover’s Delaware Water System is said by Regency Energy Partners to be the only open-access water gathering and disposal system in the Delaware Basin.

There are currently about 44 rigs running in the operating area of the Hoover assets being acquired, and there is new permitting and drilling extending south and east across the Hoover system, Regency said. "Hoover's full-service business model captures multiple revenue streams from each connected well and provides a strategic position from which to secure new business and retain current customers," Regency Energy Partners said. Near-term growth is expected to come from existing contracts across all of the Hoover businesses, and long-term growth is planned from development opportunities to be contracted in six to nine months, the partnership said.

"This acquisition further extends Regency's presence in the Delaware Basin in West Texas and supports our goal of diversifying our service offerings to our customers by adding crude and water gathering services," said Regency Energy Partners Chief Commercial Officer Jim Holotik. Hoover's geographic footprint enhances our existing Permian Basin service capabilities and expands our strategic presence in the developing Bone Spring, Wolfcamp and Wolfbone producing areas."

Regency Energy Partners said it expects the Hoover asset acquisition to be accretive in 2014 and to finance the acquisition by issuing approximately $98 million of Regency common units to Hoover. The remaining portion of the consideration will be funded from borrowings under its revolving credit facility. The acquisition is expected to close in the first quarter and is subject to antitrust clearance and other customary conditions.

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