Atlas Pipeline Partners LP (APL) agreed to acquire control of Anadarko Petroleum Corp.’s interests in the Chaney Dell and Midkiff/Benedum natural gas gathering and processing systems for $1.85 billion. The deal will double Atlas’ aggregate processing capacity and give the company a strong presence in northwestern Oklahoma and western Texas.

The Chaney Dell gas gathering and processing system, currently 100% owned by Anadarko, is in northwest Oklahoma and southern Kansas near the center of the Anadarko Basin. Throughput on the system averaged 226 MMcf/d in 2006. This system consists of the Waynoka Plant, a 200 MMcf/d cryogenic unit in Woods County, OK; the Chester Plant, a 30 MMcf/d cryogenic expander unit in Woodward County, OK; and about 3,470 miles of gathering pipeline covering six counties in the Anadarko Basin across northwestern Oklahoma and southern Kansas.

Average throughput in 2006 was 226 MMcf/d, which utilized 87% of current cryogenic capacity. Major producers on the Chaney Dell system include Chesapeake Energy, GAW Oil, Jack Exploration and Cleary Petroleum.

The Midkiff/Benedum gathering and processing system, which is approximately 73% owned by Anadarko, is in the Spraberry Trend of the Permian Basin near Midland, TX. In 2006, the Midkiff/Benedum system had approximately 139 MMcf/d of average throughput. The system consists of the Midkiff Plant, a 130 MMcf/d cryogenic facility in Reagan County, TX; the Benedum Plant, a 43 MMcf/d cryogenic facility in Upton County, TX; and approximately 2,500 miles of gathering pipeline located across four counties in the Permian Basin of West Texas.

Average throughput in 2006 was 139 MMcf/d. Major producers on the Midkiff/Benedum system include Pioneer Natural Resources, Endeavor Energy Resources, John Henry Petroleum, John L. Cox and Tamarack Petroleum.

The Midkiff/Benedum system is subject to a third party’s preferential rights, the exercise of which, if any, would occur prior to the expected closing. APL said it was assuming that no exercise of the preferential right would take place in making its announcement.

“This purchase is transformative for APL,” said APL CEO Edward E. Cohen. “APL’s aggregate processing capacity will more than double — from 350 MMcf/d to over 750 MMcf/d — and current total cash flow should nearly triple following this transaction. In addition, these new assets offer considerable opportunity for further rapid and substantial organic growth.”

Robert R. Firth, president of Atlas Pipeline Holdings, general partner of APL, said the Midkiff/Benedum system “springboards” Atlas into West Texas “where Pioneer and other producers have undertaken extensive drilling programs over the past year. There are a number of efficiency projects that have been identified by the current Anadarko field employees that we will evaluate and implement over the next coming months. This will enhance our profitability on the systems.

“Pioneer currently has great producing assets on the system as well as a great outlook for the region.”

According to Pioneer’s website, the Spraberry field in West Texas represents about 25% of its worldwide production and about 50% of total proved reserves. The company’s 440 MMBoe of proved reserves in Spraberry are about 50% developed and 50% undeveloped and include about 4,000 future drilling locations. Pioneer said last month it was increasing its drilling program in Spraberry by $60 million with plans to add four rigs to reach a total of 18 by mid-year. Pioneer said it plans to drill 350 wells this year, up from the 300 previously planned. In 2008 the company said it expects to drill 450 wells. Spraberry production is expected to grow by 18% in 2007 and by 20-25% in 2008.

APL expects to take advantage of the location of its existing Elk City-Sweetwater gathering and processing system in southwest Oklahoma (see Daily GPI, Oct. 20, 2005; April 15, 2005) by connecting these facilities to the Chaney Dell system. Additionally, APL plans to construct a new processing facility between the Elk City-Sweetwater system and the Chaney Dell system. All of these planned strategies should materially benefit cash flow past 2008. APL recently activated a newly acquired gathering and compression system that will service the Sweetwater facility, adding 10-15 MMcf/d of inlet gas to the Sweetwater plant and taking the facility to near full capacity.

“We anticipate the opportunity to create operating flexibility by assimilating these processing and gathering assets into our existing systems,” said Firth “Also, these assets are strategically placed in the Anadarko and Permian basins, which have seen significant drilling activity, and this will allow us to expand these systems to meet the growing production demands in these areas. Lastly, we expect to benefit from substantial capital improvements that the previous owner invested in these assets in late 2006.”

The acquisition is immediately accretive, APL said. Available distributable cash flow to the partnership is projected to be approximately $2.14-2.22/unit for the second half of 2007, representing a 6-10% increase compared with prior guidance, and $4.56-4.80 per unit in 2008. APL expects to distribute between $1.78 and $1.85 per limited partner unit in the second half of 2007, and expects to distribute $3.80-4.00 per limited partner unit in 2008, after an increase in its distribution coverage ratio to 1.2x. At the midpoint of this range, this payout would represent more than a 13% increase over the APL’s current distribution rate of 86 cents per quarter, or $3.44 on an annualized basis.

During a conference call with analysts, Cohen noted that the deals is also a good one for Atlas Pipeline Holdings LP. He said Atlas Holdings expects to distribute between 58-65 cents/common unit for the second half of 2007, and $1.60-1.80/common unit in 2008. At the midpoint of the 2008 range, this payout would represent a 70% increase over Atlas Holdings’ current distribution rate of 25 cents/quarter.

“This acquisition will immediately convey remarkable value to our Atlas Holdings unitholders,” said Cohen. “The addition of these profitable natural gas gathering and processing systems will more than triple the cash flow at the Atlas Pipeline level. We are pleased to be able to pass along this strong growth in the form of a significant accretion in distributions to our common unitholders, and we look forward to similar opportunities for growth in the future.”

APL will partially finance the acquisition through a private placement of $1.125 billion of its common units, of which approximately $168 million of common units, or 3.8 million APL common units, will be purchased by Atlas Holdings. Atlas Holdings will finance the purchase of the APL units through its own private placement of approximately $168 million with 6.25 million of its own common units at $27.00 per unit. In order to maintain its 2% general partner interest in APL, Atlas Holdings will contribute $23 million to APL and will fund its contribution with an advance against its existing $50 million credit facility, which matures in 2010.

Cohen told analysts the company is increasing its hedging activity in conjunction with the acquisition. “We are presently in the process of hedging through June 2010 approximately 80% of incremental production volumes from this transaction,” he said. “This augments our natural hedges generated by the composition of our throughput and processing and supplements the increased diversification of contract forms — fixed fee, percentage of proceeds, keep whole — generated by this transaction.”

The transaction has been unanimously approved by APL’s board and is expected to close on or about July 11, subject to certain approvals. Affiliates of APL and Anadarko will effect the transaction through the creation of two separate joint ventures, which will own the respective systems.

Wachovia Securities acted as sole financial advisor and provided commitments for APL’s new revolving credit facility and term loan financing arrangements. UBS Investment Bank acted as sole private placement agent.

“We are extremely pleased with this agreement, which further validates the value of our remaining midstream assets,” said Anadarko CFO Al Walker. “This transaction also represents the first significant step in our strategy to monetize our midstream assets, which also includes the formation and initial public offering of a midstream master limited partnership later this year. In 2006, cash flow before interest and taxes generated by these two systems and facilities totaled approximately $130 million.

“Our divestiture program [see Daily GPI, April 17] has now yielded approximately $12.5 billion in after-tax proceeds from announced and closed transactions. We remain on track to achieve our stated goal of $12 billion of net debt by year-end. Coupled with the performance of our retained assets, we are confident in our outlook for the remainder of the year and in our ability to execute on our strategic plan.”

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