Investors in Regency Energy Partners (RGP) saw a big jump over the past trading week after the company announced two separate deals just ahead of Christmas.
The deals mark the third large acquisition of the partnership this year which has significantly increased its operations in 2013. While investors are cheering about comments for accretion in dividends, I remain cautious as I don't believe it is sensible to grow operations that quickly.
Eagle Rock Energy's Midstream Business Acquisition
Regency Energy announced that it purchased the midstream business from Eagle Rock Energy Partners (EROC) for $1.32 billion. This will complement Regency's own gathering and possessing business, diversifying the basin exposure in Texas.
Acquired assets include 8,100 miles of gathering pipeline and 800MMcf/d of processing plants. Long-term acreage dedications support long term cash flows.
CEO Mike Bradley commented on the rationale behind the deal, "This acquisition represents another attractive growth opportunity for Regency and is very strategic to our plans to increase our scale and expand our basin diversity in liquids-rich areas, When combined with the proposed acquisition of PVR Partners, our expanded footprint will strengthen Regency's position as a midstream provider in the Mid-Continent region and provide additional growth opportunities."
Combined, Regency expects to benefit from significant synergies and enhanced services for its customers. The deal will be immediately accretive to cash flow per unit.
On the back of the deal, Regency recommends to its board to increase the distribution between 6-8% for 2014.
The deal is expected to close in the second quarter of 2014 and is subject to normal closing conditions, antitrust approval and the approval of Eagle Rock's unitholders.
Hoover Energy Midstream Acquisition
At the same time, Regency purchased the midstream assets of Hoover Energy Partners in a $290 million deal. With this deal, Regency will complement the footprint in the Delaware Basin.
Acquired assets includes crude gathering, transportation, terminals, condensate handling and disposal services, among others. The major destination is backed by a 20-year dedication agreement.
The deal is expected to close in the first quarter of 2014 and as usual is subset to normal closing conditions including antitrust approval.
Back in November, Regency Energy released its third quarter results. The partnership operates with merely $12 million in cash and equivalents and $2.98 billion in debt, for a very high net debt position.
Revenues for the first nine months of the year came in at $1.84 billion, as earnings came in at $20 million. At this pace, revenues could come in around $2.5 billion for the year, as earnings are negligible. Distributable cash flows are obviously much higher than GAAP earnings.
Trading around $26 per share, Regency Energy is valued at $5.5 billion, which does value equity in the partnership at 3.0 times annual revenues.
The quarterly distribution of $0.465 per share provides holders with a 7.2% dividend yield.
Some Historical Perspective
Shares of the partnership peaked around $35 per share in 2007 following the public offering a year earlier. Shares fell to lows of close to $5 in 2009, but recovered to trade in a $20-$30 trading range ever since. The steady and high quarterly income has provided investors with fat quarterly paychecks in the meantime.
Between 2009 and 2012, Regency Energy Partners increased its annual revenues by a cumulative 28% to $1.34 billion. Note that revenues will see significant growth on top of this in 2013 and beyond, on the back of these and other recently announced deals. This diluted ownership as the number of shares outstanding rose by 160% in recent years. This does not even account for the shares to be issued for these announced deals.
The two deals, combined worth nearly $1.6 billion mark another sizable acquisition of the partnership this year. In October of this year, Regency already announced the very sizable $5.6 billion deal of PVR Partners (PVR). In February of this year Regency already acquired the Southern Union Gathering Company for $1.5 billion.
These three deals truly transform the company, creating an enterprise valuation, including the assumption of debt, which is roughly three times as large as that a year ago.
This is quite remarkable. Just think of the enormous task ahead integrating these companies, to reap promised synergies while tripling the size of the company. As such, I believe that any firm on such a track would be acquiring at a too quick pace. For now, growth seems to be pursued for the sake of growth and not growth in terms of distribution per units.
After issuing many more units, causing real dilution, the latest two purchases will result in another $700 million being raised through new units. This will increase the amount of units outstanding by 12-13% at current levels.
Arguably this growth is not necessarily good for unitholders with the $0.465 quarterly dividend being just a little higher compared to 2009's distributions of $0.445 per quarter. Yet Regency stresses that the latest deals will be accretive to distributable cash flows per unit.
While I don't belief that this pace of acquiring is helpful for shareholders, the current dividend yield is very attractive, even for a limited partnership. This is especially true in this low interest rate environment. While this can more than offset the low dividend growth, and therefore growth prospects for the actual share price, the current yield still looks attractive.
Despite these positive points, I am very cautious as I don't belief accretion in the dividends per unit are enough reason to increase the size of the operations so much and so fast.
I remain on the sidelines.