In a deal that may augur in upstream consolidation, MLP Vanguard Natural Resources LLC (NYSE: VNR) said it will buy bruised LRR Energy LP (NYSE: LRE) in a deal worth $539 million.
Vanguard’s purchase will assume LRR's net debt of $288 million and another $251 million in a tax-free exchange of Vanguard common units at a 13% premium. The boards of both companies have approved the deal.
While Vanguard has shown expertise at integrating companies, the upstream MLP may not be a good fit with the oil industry, said Ethan H. Bellamy, analyst, Baird Energy.
“Despite the enhanced scale and scope, we maintain serious reservations about the viability of the upstream MLP business model given the ineffectiveness of risk management tools in the face of hydrocarbon cyclicality,” Bellamy said. “We look forward to seeing how and how much accretion VNR is likely to generate from the acquisition.”
Scott W. Smith, Vanguard's president and CEO, said the transaction is a great opportunity for the company and its unitholders.
“The assets being acquired are attractive bolt-ons to our Permian and Arkoma basin operations and have an inventory of development projects that generate good returns even in the current commodity environment,” he said. “We believe this transaction should have a positive impact on all aspects of our business. We look forward to welcoming the existing LRE unitholders into Vanguard.”
Kevin Smith, analyst, Raymond James, said LRR wasn’t cheap. Initial figures suggest Vanguard paid between 7.5x and 9x EBITDA for LRR, based on five-year strip pricing.
But a deal was in the making after months of low oil prices.
“Given the weakness in the crude space, which has led to widespread distribution cuts and higher leverage across this asset class, it is not surprising to see some consolidation,” Smith said. “With the pending combination of LRR Energy’s mature, low decline asset base plus the reduction in Vanguard’s leverage associated with this transaction, both Vanguard’s asset base and balance sheet should be much improved.”
Despite taking on more debt, the deal actually helps deleverage Vanguard, Smith said.
“While Vanguard’s absolute debt level will increase as it takes on LRR Energy debt, Vanguard’s absolute debt leverage ratio actually declines,” he said. “We are modeling Vanguard will finance all of the debt by using its revolver. Even excluding borrowing base credit for LRR Energy’s assets, Vanguard has roughly $350 million in undrawn borrowing base capacity.”
Transaction Highlights
- LRR offers long-life, low-decline, mature assets well-suited for Vanguard's upstream MLP model;
- Proved reserves to production ratio of about 14 years;
- Balanced production and reserves product mix of 39% oil; 48% natural gas and 13% NGL;
- Significant potential for cost savings through general and administrative (G&A) combination;
- Price hedges of about 89% of natural gas and 80% of oil proved developed production;
- Production of about 40 million cubic feet equivalent per day (MMcfe/d), increasing Vanguard's current production by 10%;
- LRR proved reserves as of yearend 2014 were about 203 Bcfe, increasing Vanguard's estimated proved reserves 10%;
- About 1,290 gross producing wells and about 158,000 net acres; and
- Transaction is expected to be immediately accretive to distributable cash flow per unit.
Citigroup Global Markets Inc. was exclusive financial adviser and Paul Hastings LLP was legal counsel to Vanguard.
Tudor, Pickering, Holt & Co. was financial adviser to LRR. Andrews Kurth LLP and Richards, Layton & Finger P.A. was the company’s legal counsel. Simmons & Co. International provided a fairness opinion to the conflicts committee of LRR’s board. Latham & Watkins LLP was legal counsel to the conflicts committee of LRR's board.
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