Eagle Rock Energy Announces Agreement to Acquire BP PLC's Texas Panhandle Midstream System and Enter Into 20-year Fixed-Fee Gathering & Processing Agreement
Aug 13, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
BP.L - BP PLC
Eagle Rock Energy Announces Agreement to Acquire BP PLC's Texas Panhandle Midstream System and Enter Into 20-year Fixed-Fee Gathering & Processing Agreement
Aug 13, 2012 / 01:00PM GMT
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Corporate Participants
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* Adam Altsuler
Eagle Rock Energy Partners, LP - Director, Corporate Finance and IR
* Joe Mills
Eagle Rock Energy Partners, LP - Chairman & CEO
* Jeff Wood
Eagle Rock Energy Partners, LP - SVP & CFO
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Conference Call Participants
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* TJ Schultz
RBC Capital Markets - Analyst
* Kevin Smith
Raymond James - Analyst
* Jeff Rudner
UBS - Analyst
* Eric Anderson
Hartford Financial - Analyst
* Ron Londe
Wells Fargo Securities - Analyst
* Sean Sneeden
Oppenheimer & Co. - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Eagle Rock conference call regarding acquisition of BP's Texas Panhandle midstream assets.
At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)
I would now like to turn the conference over to your host, Mr. Adam Altsuler, Director of Corporate Finance and Investor Relations. Please go ahead, sir.
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Adam Altsuler, Eagle Rock Energy Partners, LP - Director, Corporate Finance and IR [2]
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Thank you, Allie, and thank you to for unit holders, analysts, and other interested parties for joining us today on Eagle Rock Energy's conference call to discuss our recent agreement to acquire certain assets from BP.
Before we get started commenting on the agreement there are a few legal items that we would like to cover. First, I want to point out that remarks and answers to questions by partnership representatives on today's call may refer to or contain forward-looking statements. Such remarks or answers are subject to risk and uncertainty that could cause actual results to differ materially from those expressed or implied by such statements.
Such statements speak only as of today's date or, if different, as of the date specified. The partnership assumes no responsibility to update any forward-looking statements as of any future date. The partnership has included in its SEC filings cautionary language identifying important factors, but not necessarily all factors that could cause actual results to be materially different from those set forth in any forward-looking statement.
A more complete discussion of these risks is included in the Partnership's SEC filing, including in our 2011 annual report on Form 10-K as well as any other public filings. Our SEC filings are publicly available on the SEC's Edgar system.
Management could discuss its views on future distributions during this call. Management's objectives around future distribution recommendations are subject to change should factors affecting the general business climate, market conditions, commodity prices, our specific operations, performance of our underlying assets, applicable regulatory mandates, or our ability to consummate accretive growth projects differ from current expectations.
For example, our future distribution recommendations may be lower than the current guidance if the current weakness in natural gas prices and NGLs in particular persist beyond early 2013 and impact our and our producer customers drilling plans. Actual future distributions will be determined, declared, and paid at the discretion of the Board of Directors.
I will now turn the call over to Joe Mills, our Chairman and CEO, for a discussion of the agreement.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [3]
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Thank you, Adam. Good morning, ladies and gentlemen. Thank you for joining us on this call to discuss our recent agreement to acquire certain midstream assets from BP America Production Company. Eagle Rock announced last Friday, August 10, that we signed a definitive agreement to acquire BP's Sunray and Hemphill processing plants and all the associated 2,500 mile gathering system that serves the liquid-rich Texas Panhandle for a total consideration of $227.5 million cash -- all subject to customary purchase price adjustments.
In connection with the acquisition, we will enter into at closing a 20-year fixed fee Gas Gathering and Processing Agreement with BP under which we will gather and process BP's natural gas production from the existing connected wells. Furthermore, BP and its joint venture partners will commit to us under the same gas gathering and processing terms all future natural gas production from new wells drilled within an initial two-year period from the closing subject to mutually agreed extensions and within a two-mile radius of the existing 2,500 mile gathering system.
Gathering volumes on BP's system in the first half of 2012 average approximately 180 million cubic feet per day and we expect to continue to grow the overall throughput from the Texas Panhandle area based on the drilling programs from BP and third-party producers active in this area.
Strategic benefits of the transaction include, one, it significantly expands and strategically complements our existing gathering and processing systems in the Granite Wash, the Cleveland, the Tonkawa, and Hogshooter plays in the Texas Panhandle. Two, it established a long-term strategic partnership with BP through BP's commitment of existing and future production on an extensive acreage dedication in the Texas Panhandle.
Three, it increases our fixed fee contract mix within our midstream business. And, four, we anticipate the volume growth and integration benefits will provide a path to meaningful accretion to our distributable cash flow per unit in 2014 and beyond. The closing of the acquisition is expected to occur on October 1 of this year, which is also the effective date, all subject to regulatory clearances including premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions.
The BP Panhandle System we are purchasing consists of two cryogenic processing plants, the Sunray and Hemphill plants, with processing capacity of approximately 220 million cubic feet per day and approximately 2,500 miles of gathering pipelines serving over 350,000 dedicated acres in Lipscomb, Hemphill, Roberts, Ochiltree, Hansford, Hutchinson, Sherman, and Moore counties in the Texas Panhandle. Approximately 2,100 wells are currently connected to the BP panhandling system.
The system also includes 47 mainline gathering compressors, 25 satellites gathering compressors, and 19 in-plant compressors.
BP's natural gas production represents approximately 55% of the system's current throughput, which will be subject to this Gas Gathering and Processing Agreement that BP and Eagle Rock will execute at the closing which, of course, will be a fixed fee based contract. The BP Panhandle System is located adjacent and complementary to our existing Texas Panhandle assets which include eight processing plants and approximately 3,963 miles of gathering pipelines.
Upon closing the acquisition of the BP system we plan to integrate the BP system with our existing system in the area, resulting in Eagle Rock operating almost 6,500 miles of combined gathering pipelines serving over 5,000 wells and over 480 million cubic feet a day of combined processing capacity in the Texas Panhandle with an additional 60 million cubic feet a day expected to come online in the first half of 2013 following the completion of our previously announced Wheeler plant which is to be located in Wheeler County, Texas.
The combined system will strengthen our position in the growing Granite Wash, Cleveland, Tonkawa, and Hogshooter plays, and provide increased flexibility and capacity in servicing our producer customers. We estimate the current gathering volumes from the combined systems total approximately 380 million cubic feet per day.
Over the weekend we posted a map of the two combined systems on our website which demonstrates the complementary nature of the acquired assets. Please go look at our website for that map.
Drilling activity in the Texas Panhandle remains robust with 83 drilling rigs currently operating, of which 17 rigs are drilling on acres dedicated to the combined Eagle Rock and BP Panhandle systems. There has been over 500 wells permitted over the past six months in the Texas Panhandle reflecting the continued active drilling potential of the area.
We expect the integration of the two systems to result in future cost savings and our ability to optimize our existing processing capacity. As part of the transaction Eagle Rock and BP will enter into, at closing, an initial 20-year term Gas Gathering and Processing Agreement, which will provide for 100% fixed fee-based revenues to Eagle Rock and includes a substantial acreage dedication from BP and its joint venture partners.
All of BP's existing wells connected today to the BP Panhandle System will be dedicated to Eagle Rock for an initial term of 20 years with the option by the parties to extend this agreement for two separate additional five-year terms. In addition, all future drilling by BP and its joint venture partners for a period of two years from the closing date of October 1 of this year and within two miles of the system, which encompasses almost 350,000 acres and over 500 drilling locations, will also be dedicated to Eagle Rock under the gathering and processing agreement, which can also be extended by mutual agreement by the parties for additional [five-year] increments.
Due to the liquids rich quality of the natural gas production in the Granite Wash, the Tonkawa, the Hogshooter, and Cleveland plays in the Texas Panhandle, BP and its joint venture partners have maintained an active drilling and development plan for the Ochiltree and Hemphill County area in 2012, and we expect them to further develop their dedicated properties in 2013 and beyond. Based on our expectations of volume growth by BP and its joint venture partners, we anticipate the fixed fee-based component of our midstream business contract mix to increased to approximately 30% in 2014 from the current level of close to 20%.
Third-party producers connected to BP's system and active in the area include Apache, Chesapeake, Comstock, ConocoPhillips, EOG, Exxon Mobil, Lynn Energy, [Blue Bird] Oil Company, and [Ultimate] Unit Petroleum. We anticipate growing these third-party volumes through enhanced commercial efforts across the BP system where BP was previously capacity constrained.
We expect the acquisition to be neutral to distributable cash flow per unit in 2013 and high single-digit accretion to low double-digit accretion to our distributable cash flow per unit in 2014 subject to commodity prices, market, and other conditions. Following the anticipated ramp up in throughput volumes and cost savings as a result of integrating the BP system into our existing system in the area, based on our assumptions we estimate the purchase price to represent a 9 to 10x multiple of the acquired asset's 2013 estimated EBITDA contribution and a 5.5 to 6.5x multiple of the acquired assets 2014 estimated EBITDA contribution subject to market and other conditions.
With that I would like now to take this opportunity to open the call to limited questions about the acquisition.
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Questions and Answers
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Operator [1]
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(Operator Instructions) TJ Schultz, RBC Capital Markets.
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TJ Schultz, RBC Capital Markets - Analyst [2]
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Good morning and congratulations. I guess just, Joe, maybe if you could talk a little bit more about the expected cost savings and/or the processing synergies that you discussed. Just trying to help us understand any advantage that this maybe gave you in the bidding process and then trying to quantify how much of those integration benefits are leading to some of the 2014 accretion that you discussed.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [3]
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Absolutely. Again, I would urge you to look at our map or the map on our website. You can see the complementary nature of the two systems.
We think it gave us a strong competitive advantage in the bidding process with BP in terms of our ability to pretty seamlessly integrate these two systems together and, therefore, be able to add or offer a lot more capacity, processing capacity, which has been the limiting factor.
BP, of course, has operated these assets really as a part of its upstream portfolio. They have done an exceptional job. These are really high-quality assets and we are very excited that they have chosen Eagle Rock to be a long-term strategic partner and also sell us these assets.
In terms of our ability to integrate systems, we believe there will be a handful of interconnects that we will have to establish and some could involve laying some additional pipelines in order to help debottleneck their system and, therefore, be able to move gas because they are capacity constrained on their side. There is a lot of development activity going on in the Panhandle so we think by doing those interconnects and being able to really more effectively utilize the overall two systems as one, i.e., create a super system, we will be able to move gas between the plants therefore offering more capacity opportunities to third-party producers.
So clearly we will be focusing -- the integration of these two assets will take a little bit of time and so, hence, part of the reason that we are neutral to DCF per unit in 2013. But clearly then we think volumes will ramp up significantly toward the end of 2013 and into early 2014 and therefore the high single-digit to low double-digit accretion in 2014.
In terms of the cost savings, we are anticipating probably in the $5 million to $10 million range of cost savings once we integrate the two systems. Clearly there is strong overlap between our two systems, but more importantly our ability to just simply move more gas and do it with the same number of people we think that is going to be very accretive. So we are expecting $5 million to $10 million of OpEx savings in the next couple of years.
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TJ Schultz, RBC Capital Markets - Analyst [4]
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Okay, great. Thanks. I guess just then on the volume growth that you discussed on the BP system, just any color on expected BP growth here versus third-party growth? Then it sounds like some interconnects and pipes are needed here. Just if you could discuss the additional kind of CapEx requirements that would be needed to drive some of that growth.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [5]
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So I guess, first off, clearly we are just thrilled to be long-term partners with BP. BP's position here is really a premier position in the Texas Panhandle, so today connected to the system is over 350,000 net acres that is operated and controlled by BP, all leasehold. That is all really held by production.
Clearly, BP has been active for -- they have owned this position for decades. They also have a number of what they consider to be joint venture partners that drill on their land under terms that they negotiate. We think -- of course, all that future drilling, as I mentioned on my prepared text, will be dedicated to us. So whether it is BP or joint venture partners drilling, that will be dedicated to us.
We think that we -- given the superior economics of the Granite Wash and the Cleveland, the Tonkawa, and now the Hogshooter, we anticipate that there will still be a pretty strong level of activity in this area. And now with our ability to integrate the two systems and, therefore, offer more capacity opportunities to both BP as joint venture partners as well as third parties, we think that is going to be a real competitive advantage for us.
As I mentioned earlier, 55% of the current volumes are BP's equity volume so 45% of current throughput is third parties. I touched on some of those third parties. Whether it is Apache or Chesapeake or Lynn, clearly all those companies are very active in this area so we are excited about the opportunity to not only service BP as well as these third-party operators, which many of them are current existing customers to Eagle Rock today anyways.
So we just see this as an extension of our existing system as well as really extending our reach into what we consider to be one of the premier plays in the country being the Granite Wash.
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Jeff Wood, Eagle Rock Energy Partners, LP - SVP & CFO [6]
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TJ, this is Jeff. I guess I would just say in terms of the kind of CapEx potential, the great thing about this and the really complementary nature of the system is that we feel that our CapEx relative to maybe some others on the system would be more limited. What we are looking for here is, as Joe mentioned, the interconnects and then a lot of well connect capital and maybe us some relatively short-line pipeline spending just to fully interconnect the two systems.
But to get the volume growth that we are expecting, we do not today anticipate having to build a new plant. But I will say one of the other great things about this is that we would have three pad sites that are that will readily accommodate additional expansions so that if growth comes on even higher than we are anticipating when Joe quoted some of those financial metrics, I think we will be in a very good position to continue to add to our processing capacity to meet BP and its partners and other third-party producers' needs.
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TJ Schultz, RBC Capital Markets - Analyst [7]
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Okay, great. Thanks, guys. Congrats.
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Operator [8]
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Kevin Smith, Raymond James.
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Kevin Smith, Raymond James - Analyst [9]
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Good morning. Congrats, it looks like these assets fit very nicely into your portfolio.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [10]
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Thank you.
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Kevin Smith, Raymond James - Analyst [11]
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Just two questions. When we talk about the contracts you said 55% of the volumes are contracted. Is that all BP or is that BP and their joint ventures, is that BP and some other people? And then the other side of that, the other 45%, how should I think about that?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [12]
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So the 55% is BP's equity gas. It does not include their joint venture partners or third parties, so clearly the joint venture partners are in the remaining 45%. I mentioned earlier their partners are high-quality oil and gas companies that are obviously very active in the area utilizing, of course, horizontal drilling and frac technology to really open up this play.
But then there is the third party. And remember what I said earlier, BP has done an exceptional job of operating these assets for quite a while but again as an upstream company they focused really -- these assets were built for their own equity gas. So while they certainly did some commercial efforts in the sense of that as people were drilling nearby and BP's systems were there and they could negotiate to get in BP was not in the business of trying to actively grow those third-party volumes. That really wasn't what the system was there for.
Clearly, that is not -- our charge is to grow those volumes and to not only attract BP as well as any of the third-party producers. So you can imagine we will have a very focused, enhanced commercial efforts around these assets which we think BP has just not done historically and that has not been their charge. But, clearly, we will refocus and focus on enhancing the commercial efforts.
We think because of the incremental capacity that we now bring to the system -- remember they are capacity constrained today. By doing the interconnects and the integration we will be able to offer what we think is a superior product to the customer base.
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Kevin Smith, Raymond James - Analyst [13]
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Got you. Then, lastly, the other question I guess you said that the plants are processing 180 million a day and I believe you said capacity is 220 million. So is your 2014 numbers, if I have all that correctly, assume that you fill the capacity?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [14]
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Yes. We clearly intend to fill up that capacity pretty fast. Then, of course, with our Phoenix and then, of course, our recently added Woodall and then soon to be added Wheeler that is where we will continue to add or fill up those plants as well with the new volumes coming across the combined systems.
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Kevin Smith, Raymond James - Analyst [15]
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Okay. That is all I had. Thank you.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [16]
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Thank you, Kevin.
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Operator [17]
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Jeff Rudner, UBS.
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Jeff Rudner, UBS - Analyst [18]
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Good morning, gentlemen, and congratulations on what appears to be a very good acquisition for the Company.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [19]
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Thank you, Jeff.
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Jeff Rudner, UBS - Analyst [20]
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I would like to ask a question or two about the distributable cash flow. You mentioned in the press release that you expect it to be accretive in 2014 and beyond, and in the conference call you indicated also it would be somewhat significantly accretive. Will the acquisition have any effect on the distributable cash flow in 2013, either positively or negatively?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [21]
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Yes, as we said in the prepared text, we expect it to be neutral to our distributable cash flow per unit in 2013, and a large part of that is just the integration of the two systems. That is going to take us a little bit of time and then we will see volumes start to ramp as we approach the end of 2013 and, of course, the end of 2014.
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Jeff Rudner, UBS - Analyst [22]
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Okay. And are you able to quantify it all, how significant the distributable cash flow might be in 2014?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [23]
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Yes, in 2014 we are expecting double-digit, low double-digit accretion in 2014.
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Jeff Rudner, UBS - Analyst [24]
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And that is based on the current dividend of --?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [25]
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Yes, sir, that is correct. Based on the current BCF annualized at $0.88.
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Jeff Rudner, UBS - Analyst [26]
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Okay. Thanks very much and congratulations again.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [27]
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Thanks, Jeff.
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Operator [28]
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Eric Anderson, Hartford Financial.
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Eric Anderson, Hartford Financial - Analyst [29]
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Good morning. I would like to add my congratulations as well. Looks to me like, Joe, you are basically getting this system for what it might cost you to build the capacity and what comes along is all the agreements and the interconnects and the incremental volume. So looks like a very good deal.
Can you tell me about the 20-year term? Is that something that is typical for a fixed fee kind of an arrangement, or is that something that BP wanted to go out that long?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [30]
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Thank you, Eric. Great question. So 20 years is not typical. We were very pleased to be able to negotiate a 20-year agreement with BP. Clearly, it represents a strategic alliance going forward with the ability, of course, to extend those agreements, the 20 years to be able to extend it in five-year increments.
A lot of times these days you will see 10-year type agreements. 20 is -- we are really proud to see 20 years. We think it just highlights the strategic relationship that BP intends to establish with us and we, of course, with them, so we are excited about that agreement.
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Eric Anderson, Hartford Financial - Analyst [31]
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And if I could just add a follow-up. On the western part of their system, I guess it is the Sunray plant, I know that on the western part of your system it is more of a low-pressure type of a system that is somewhat different than the actual core of the Granite Wash. How does their system over there stack up in terms of that?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [32]
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Thank you, Eric. Actually that is a great question. In fact, their Sunray and, of course, their West Panhandle really mirrors our West Panhandle. When we started work on this with BP we both were pleasantly surprised at how duplicate our two systems really look to each other. They are literally mirrors of each other.
So their west system is just like our west side which is on vacuum, so that means that we literally suck the gas out of the ground. They do that on their side just like we do. The geological reservoir that they gather gas from is identical to the same reservoir that we gather gas from on the west side also being the brown dolomite.
So in terms of the composition of the gas, it is very rich in liquid, eight-plus gallons per 1,000 cubic feet. It does tend to have high nitrogen and high helium, which we are actually very pleased because Sunray really is a high-quality asset. In fact, Sunray was the largest processing plant in the Texas Panhandle for really decades. Probably only until the past year or two has somebody brought on a slightly larger plant at 200 million a day.
But sunray has always been one of the premier processing plants in the Texas Panhandle. It has nitrogen recovery capabilities as well as helium recovery capabilities, which we do not have today. And so one of the things that is exciting for us is our ability to interconnect on the west side their system with hours. In fact, we will then start to move high helium, high liquids from our west side over to their Sunray.
But in order to do that we have to established the interconnects on the east side first. So today BP moves a lot of gas from their East Panhandle down a 26-inch pipeline to the Sunray plant because that is where the biggest amount of capacity is.
Our goal is to establish interconnects on the east side first. That will relieve pressure off of their system and allow it to move into our system, which again looks identical. So that it is the Cleveland, the Granite Wash; typically 3.5 to 5 gallons per thousand. Same reservoir, same reservoir characteristics.
So we will first relieve pressure off their east side, which will then give us combined capacity at Sunray. We will then establish an interconnect on the west side and then start to move some of our very rich and high nitrogen, high helium product up to Sunray, which will allow us actually to recover certainly the high NGLs as well as the nitrogen and be helium, which today we have trouble with. So in fact, it has a lot of operational benefits that really enhances Eagle Rock's current operations today.
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Eric Anderson, Hartford Financial - Analyst [33]
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Are most of the rigs that are running on the traditional granite core or is their activity in that area as well?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [34]
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In fact there is activity out in the Moore County area. Of course, that is long life, shallow decline; it is the brown dolomite. But there has been a handful of producers.
Again, there is -- we will be putting out subsequent to this a map that shows all the rig activity in the area, but there is some rigs running today in Moore County which is in and around their systems that gives us upside for additional volume growth that goes into Sunray. Clearly, the bulk of the activity will come from the east side. That is clearly where the Granite Wash, the Cleveland, and the Hogshooter, that is where the bulk of the plays are going on.
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Eric Anderson, Hartford Financial - Analyst [35]
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Great job in getting it done.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [36]
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Thank you very much, Eric.
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Operator [37]
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(Operator Instructions) Ron Londe, Wells Fargo.
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Ron Londe, Wells Fargo Securities - Analyst [38]
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Can you give us some perspective on how you are going to finance the remaining $150 million in cash?
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Jeff Wood, Eagle Rock Energy Partners, LP - SVP & CFO [39]
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Ron, this is Jeff. As you probably saw, we filed a prospectus supplement this morning. I would just encourage you to look at that document, which is of course on the website, the SEC.gov website. We really can't talk anything more about the financing.
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Ron Londe, Wells Fargo Securities - Analyst [40]
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Okay, thank you.
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Jeff Wood, Eagle Rock Energy Partners, LP - SVP & CFO [41]
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Sorry about that.
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Operator [42]
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[Sean Sneeden], Oppenheimer.
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Sean Sneeden, Oppenheimer & Co. - Analyst [43]
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Perhaps thinking about the previous caller's last question a little bit differently, would you consider using additional debt to help finance the deal at all?
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [44]
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Again, unfortunately right now with an active registration statement out there we are just going to need to refer you to the prospectus supplement and that is about all we can say right now unfortunately.
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Sean Sneeden, Oppenheimer & Co. - Analyst [45]
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Okay, thank you.
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Operator [46]
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I am showing no further questions at this time. I would like to turn the conference back over to Mr. Joe Mills for any closing remarks.
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Joe Mills, Eagle Rock Energy Partners, LP - Chairman & CEO [47]
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Thank you very much. Ladies and gentlemen, I really appreciate you getting on the call this early. Sorry we had to put out the press release Friday night, but really Reg FD required us to get the news out there as soon as we signed the document.
However, we are very, very excited about this acquisition and what it does for Eagle Rock. It clearly significantly bolsters our midstream business in what we consider to be really our core area, being the Texas Panhandle. So, clearly, we will be talking a lot about this deal for the next several quarters as we go through the closing and, of course, the subsequent integration.
So thank you again for listening in and, clearly, we will have more to say about this very soon. Thank you.
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Operator [48]
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Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.
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