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Analyst Blog

On Oct 14, 2013, PVR Partners, L.P.’s unit price increased 2.9% to $ 26.50 per unit from the closing price of Oct 10. Improvement in unit price was primarily due to the announcement of acquisition of the partnership by Regency Energy Partners LP (RGP - Snapshot Report) on Oct 10, 2013.

Regency Energy announced that the board of directors of both the entities approved the deal to acquire PVR Partners for approximately $5.6 billion. The transaction is expected to be a unit-for-unit transaction, with a one-time cash payment to the PVR unitholders. The transaction is expected to be settled in first-quarter 2014. Post deal, the combined entity will be named Regency with headquarter in Dallas.

Per the agreement, the unitholders of PVR Partners’ common units, Class B units and special units will get 1.020 units of Regency Energy common unit in exchange for each common unit of PVR Partners. The unitholders of PVR Partners will also obtain one-time cash payment at closing of the merger which is calculated to be approximately $40 million in aggregate. The rate of common unit will be $28.68, calculated on the basis of trailing 10-day average closing price of PVR Partners’ common units through Oct 9, 2013.

We believe that the transaction will create a win-win situation for both the organizations. We are concerned about PVR Partners’ current debt level along with a declining cash position. As of Jun 30, 2013, the fair value of PVR Partners’ fixed-rate debt was $1.3 billion, up from $0.9 billion as of Dec 31, 2012. The partnership had a cash balance of $13.9 million as of Jun 30, 2013 versus $14.7 million as of Dec 31, 2012. In addition, the partnership issued both senior notes and common units in the last six months, which will subsequently increase future cost of funds. As per the merger-related agreement, Regency Energy is expected to service PVR Partners’ existing debt with an allocation of $1.8 billion, which will help PVR Partners to manage its debt burden.

Regency Energy Partners is engaged in gathering and processing, and transportation of natural gas and transportation, fractionation and storage of natural gas liquids. We note that the proposed acquisition will enable Regency Energy to leverage PVR Partners’ properties in Appalachia and the Mid-Continent region while strengthening as well as diversifying its footprint in the South Texas, Permian Basin and North Louisiana. Further, this acquisition will help Regency Energy to serve more number of petroleum companies, which operate primarily in the Permian Basin, and Eagle Ford, Marcellus and Utica shale plays.

PVR Partners currently has a Zacks Rank #4 (Sell). However, other stocks from the industry that are presently performing well include EQT Midstream Partners, LP (EQM - Snapshot Report) and Kinder Morgan, Inc. (KMI - Analyst Report), each with a Zacks Rank #1 (Strong Buy).

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