Magnum Hunter Resources Corp. picked a new business partner for its midstream subsidiary, Eureka Hunter Holdings LLC, in a move that it said Tuesday will create significant savings and more flexibility for its upstream operations.

Morgan Stanley Infrastructure Inc. (MSI) will purchase ArcLight Capital Partners LLC's 41% equity interests in Eureka Hunter in a deal that's expected to close next month, Magnum said. The agreement will also allow Magnum to sell another 6.5% of the equity interests in Eureka to MSI in a separate closing anticipated in January.

Although the purchase price for ArcLight's interests was not disclosed, Magnum said the additional 6.5% will cost MSI $65 million, which Magnum said when combined with the October deal, represents an implied Eureka value of $1 billion.

Wunderlich Securities analyst Irene Haas called the deal a smart move and said the potential valuation sets Eureka up to go public next year.

"[Magnum] has been talking about looking for a new partner in the Eureka Hunter venture, and we believe that this is a very good move. The company has spent more than four years of hard work and investment on Eureka Hunter, which is proving to be mission critical for its upstream business," she said. "However, being able to not worry about funding Eureka Hunter is very positive for [Magnum]."

Under the deal, Magnum will have a right to defer up to $40 million of its proportionate future capital contributions to Eureka for up to six months at a time and instead have MSI pay those costs. Eureka will also no longer have to pay a cash preferred dividend to any equity holder, which Magnum said will save it $16 million per year.

When MSI purchases the additional 6.5% interests, it will own an equal share in Eureka. Magnum CEO Gary Evans said MSI shares a similar vision and business philosophy for Eureka, which will better allow the subsidiary's assets to grow over time.

The announcement comes during a time of transition at Magnum. In the last year or so, it has divested several noncore assets in Canada, South Texas and West Virginia (see Shale Daily, April 22). It also recently announced plans to monetize some of its remaining North Dakota assets in a bid that will find it transforming into an Appalachian pure-play focused on the Marcellus and Utica shales, where its Eureka Hunter pipeline system has been growing (see Shale Daily, Aug 11).

In the second quarter throughput on the system averaged a record-high 223,573 MMBtu/d. Capacity on the system is expected to grow to 1.5 Bcf/d over the next year with interconnects planned to several major interstate pipelines in the basin.