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Penn Virginia to Buy Midstream Firm

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Penn Virginia Resource Partners, L.P. has entered into a definitive agreement under which it will acquire Chief Gathering LLC, a midstream pipeline company, for $1.0 billion.

Penn Virginia currently owns two gathering systems in the counties of Lycoming and Wyoming while a third gathering system is in its early stage of development in Susquehanna County. Post-acquisition, the partnership will add to its portfolio six more natural gas gathering systems of Chief Gathering spread across 300,000 acres in Bradford, Lycoming, Sullivan, Susquehanna, Wyoming and Greene Counties, Pennsylvania and Preston County.

Moreover, Chief Gathering is currently constructing a new 750 million cubic feet per day (MMcfd) trunkline that extends from northern Wyoming County to Luzerne County with a connection to Transco's interstate pipeline. It is expected to come online in the third quarter of 2012. The new Wyoming County trunkline has volume commitments of 255 MMcfd for 2012 and 355 MMcfd for 2013.

Penn Virginia plans the funding of the acquisition through a combination of equity and debt. The company will issue $200 million of new class of Penn Virginia limited partner interests to the Chief Gathering system.

The balance of $800 million will be funded by issuing $400 million in units of a new class of Penn Virginia limited partner interests to investment entities affiliated with Riverstone Global Energy and Power Fund V, LP, approximately $180 million in Penn Virginia common units in private placement institutional investors and for the rest of $220 million, the company has obtained a commitment from Royal Bank of Canada for a senior unsecured bridge facility.

Chief Gathering has operating assets that serve Marcellus Shale natural gas producers primarily in northeastern Pennsylvania. As of February 2012, volumes on the Chief Gathering systems were approximately 235 MMcfd and volumes on Penn Virginia's Marcellus systems were approximately 210 MMcfd.

The current transaction will help Penn Virginia to capture significant opportunities from six of the most productive counties in the northeastern area of the Marcellus Shale, in addition to the assets in Lycoming and Wyoming County.

The acquisition will clearly mark Penn Virginia as the leader in the midstream business with significant assets in both the Marcellus Shale and the Granite Wash. These two shales are among the lowest-cost natural gas production areas in the United States. Also, the operational proximity of the two pipeline entities and connectivity with both Transco and Tennessee interstate pipelines will create significant operating synergies.

Overall, the deal will result in a major expansion of the partnership’s pipeline systems so much so that the partnership expects 75% of its EBITDA to come from the midstream business by year-end 2013, up from the present level of 40-45%.

In January this year, the company had acquired an option from the Rail-Trail Council of Northeastern Pennsylvania to purchase a pipeline easement in Susquehanna County along a 28.8 mile right-of-way corridor in the Pennsylvania Marcellus Shale.

Given its ongoing growth projects and acquisitions, we believe that Penn Virginia is well poised to increase its cash distribution rate. Key growth drivers include a diversified asset base, low-risk coal-royalty business, robust midstream operations, solid balance sheet and strong distribution growth.

However, we prefer to remain on the sidelines given the doubtful capital markets and fluctuation in commodity prices. The partnership presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. Some of Penn Virginia’s main competitors are Arch Coal Inc. (ACI - Analyst Report) and CONSOL Energy Inc. (CNX - Analyst Report).

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