BP America Production Co. on Friday said it is selling the Sunray and Hemphill natural gas processing plants in the Texas Panhandle, together with their 2,500-mile associated gas gathering pipeline system, to Houston midstream operator Eagle Rock Energy Partners LP for $227.5 million in cash.

The Sunray plant, in Moore County, and the Hemphill plant, in Hemphill County, collectively known as the BP Panhandle System, have combined processing capacity of about 220 MMcf/d.

BP believes these assets, which serve BP's natural gas production in the Texas Panhandle region, will be more strategically valuable to a company that specializes in midstream oil and gas operations," the company stated. The agreement does not include BP's natural gas producing assets in the area.

The transaction expands and strategically complements Eagle Rock's midstream systems in the Granite Wash, Cleveland, Tonkawa and Hogshooter plays and it would increase Eagle Rock's fixed-fee contract mix within its midstream business.

Once the sale closes, which is expected in early October, Eagle Rock and BP plan to begin a 20-year, fixed-fee midstream agreement under which Eagle Rock would gather and process BP's natural gas production from the existing connected wells. BP and its partners also agreed to commit to Eagle Rock under the same terms all future natural gas production from new wells drilled within an initial two-year period from closing, subject to mutually agreed extensions, and within a two-mile radius of the existing 2,500 mile gathering system.

The transaction "meaningfully grows and strengthens our midstream gathering and processing position in the liquids-rich Granite Wash and Cleveland plays in the Texas Panhandle," said Eagle Rock CEO Joseph A. Mills. "This acquisition brings to Eagle Rock a strong strategic partner in BP and enhanced financial stability with 55% of the existing volumes on the BP Panhandle System being dedicated under attractive long-term, fixed-fee contracts. In addition, the acquisition adds significant scale and reach to our existing position in additional liquids-rich natural gas plays."

The acquisition, Mills added, "is consistent with our strategy of pursuing the most accretive long-term opportunities across our midstream and upstream businesses, and we expect this transaction to be accretive to Eagle Rock's distributable cash flow in 2014 and beyond."

The BP Panhandle System gathering volumes in the first half of 2012 averaged around 180 MMcf/d. The two plants serve more than 350,000 dedicated acres in Lipscomb, Hemphill, Roberts, Ochiltree, Hansford, Hutchinson, Sherman and Moore counties; about 2,100 wells currently are connected to the system. BP's natural gas production represents about 55% of the system's current throughput.

The system is immediately adjacent and complementary to Eagle Rock's existing Texas Panhandle assets, which include eight processing plants and 3,963 miles of gathering pipelines. Hemphill County is in the heart of the prolific Granite Wash play, Eagle Rock noted.

"The Hemphill plant and supporting infrastructure were designed to accommodate one or more additional expansions and are located just north of Eagle Rock's recently completed 60 MMcf/d cryogenic Woodall Plant." The BP system also includes 47 mainline gathering compressors, 25 satellite gathering compressors and 19 in-plant compressors.

Eagle Rock plans to integrate the BP Panhandle System with its existing system in the area, which would result in around 6,463 miles of combined gathering pipelines serving 5,000-plus wells and more than 480 MMcf/d of combined processing capacity. An additional 60 MMcf/d of capacity is expected to come on-line in the first half of 2013 following the completion of Eagle Rock's Wheeler Plant.

The total current gathering volumes from the combined systems would equal about 380 MMcf/d, according to Eagle Rock.

"Due to the liquids-rich quality of the natural gas production in the Granite Wash and Cleveland plays in the Texas Panhandle, BP and its joint venture partners have maintained an active drilling and development plan for the Ochiltree and Hemphill County area in 2012 and expect to continue to further develop the dedicated properties in 2013 and beyond," noted the partnership. "Based on Eagle Rock's expectations of volume growth by BP and its joint venture partners, the partnership anticipates the fixed-fee based component of its midstream business contract mix to increase to approximately 30% in 2014 from the current level of approximately 20%."

Third-party producers connected to the BP Panhandle System and active in the area include Apache Corp., Chesapeake Energy Corp., Comstock Resources, ConocoPhillips, EOG Resources Inc., ExxonMobil Corp., Linn Energy, Mewbourne Oil Co. and Unit Petroleum, said Eagle Rock. The other producers are not subject to the fixed-fee midstream agreement, but "Eagle Rock anticipates growing third-party volumes through enhanced commercial efforts on the BP Panhandle System, where BP was previously capacity-constrained."

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