Eagle Rock to sell midstream business for $1.3B

HOUSTON – Houston-based Eagle Rock Energy Partners is selling 8,100 miles of gathering pipelines and several processing plants for $1.3 billion, a deal that would turn it into a pure upstream firm, the company said Monday.

The buyer, Dallas-based midstream firm Regency Energy Partners, would take on a portion of  Eagle Rock’s debt, allowing Eagle Rock bondholders to exchange up to $550 million in senior notes for Regency notes. The bond exchange is part of a complex deal that would “streamline our business and reduce our debt,” said Jeffrey Wood, chief financial officer for Eagle Rock, during a conference call with investors Monday.

“We’ll be in a position to get back on the growth trail,” Wood said.

Under the agreement, Regency would issue $200 million in common units to Eagle Rock.

The deal is expected to close in the second quarter of 2014.

Both Eagle Rock and Regency Energy are master limited partnerships, tax-advantaged corporate structures that typically pay investors regular cash distributions and that have signed the bulk of oil and gas deals this year.

With increased capital and lower debt, Eagle Rock expects to be much more focused on mergers and acquisitions markets next years, said Joseph Mills, chairman and chief executive for Eagle Rock, during the conference call. The company wants to find some acquisitions that would bolster cash distributions to unitholders.

The deal “provides better clarity” for investors in Eagle Rock’s split midstream and upstream business, and “we also like the fact that there’s more opportunity for growth in the upstream space,” Mills said.

Eagle Rock’s upstream assets house 350 billion cubic feet of natural gas equivalent in reserves. Two-thirds of the partnership’s reserves are located in the mid-continental U.S., and the rest come from Texas, Alabama and Mississippi. More than half of Eagle Rock’s upstream reserves are natural gas, while oil and natural gas liquids make up about 44 percent of the company’s reserves, according to Eagle Rock’s investor materials.

Meanwhile, Regency also agreed Monday to pay $290 million for Houston-based Hoover Energy Partners’ oil and gas gathering pipeline and other midstream assets in the Delaware Basin in West Texas, the MLP. The Dallas firm also said it would issue another $400 million in units to Energy Transfer Equity, which owns Regency’s general partner, to pay for the deal with Eagle Rock.

Eagle Rock units rose 13.3 percent to $5.96 and Regency units increased 4.24 percent to $25.17 in early trading Monday.