Regency Energy Partners LP possesses a great appetite for growth, but consider what is now on its plate:
- PVR Partners: acquisition for $5.6 billion;
- Eagle Rock Energy Partners LP: pending acquisition of midstream business, about $1.3 billion; and
- Hoover Energy Partners LP: acquisition for about $290 million.
Regency’s grocery bill lands somewhere north of $7 billion; its market capitalization is around $6 billion. Are its eyes too big for its wallet?
Not at all, believes Abhiram Rajendran, senior analyst for MLP research with Credit Suisse, who acknowledged the risks posed by the sheer size of the deals.
“Definitely, the size of the deal and the scope of the assets bring with it some integration risk,” he told Midstream Business. “Assuming that management can properly integrate the assets and operationally get it all in order, the rewards for the transaction outweigh the risks.”
Rajendran has confidence that the management team, led by President and CEO Mike Bradley, can get it done and is particularly enthused about PVR’s Marcellus and Utica assets that have been added to Regency’s portfolio.
“Having a presence in those areas is definitely a positive for Regency,” he said. “It’s not an area that they were exposed to previously. It’s really going to be the fastest-growing area in the U.S. and having a footprint there—and one of the larger footprints—is definitely going to provide opportunity.”
Ethan H. Bellamy of Baird Equity Research shares the positive outlook: “RGP has proven its ability to find strategic rationale and financial accretion from the acquisition of assets with modest growth potential and uneven operational histories,” he wrote in a recent report.
Rajendran likes how PVR’s Midcontinent assets reinforce Regency’s presence in that region and how Eagle Rock’s assets in the Texas Panhandle will enhance customer offerings when that deal closes. He also sees a long-term financial upside.
“The reason I’m more positive than some of my peers on this name is that I think that the combination of all these acquisitions changes the cash distribution growth profile,” he said. Regency has averaged low single-digit cash distribution growth in recent years. This year, it’s up to the 6% to 8% range. Rajendran expects the addition of PVR to boost cash distribution into the mid-to high-single digits for many years. “That’s a step change that’s not being priced into the stock,” he said.
Bon appétit, Regency.
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