Energy exploration and production company Vanguard Natural Resources LLC (VNR, Financial) and smaller oil and gas company Eagle Rock Energy Partners L.P (EROC, Financial) announced a merger agreement, late last night. According to the terms of the agreement, approved by the Board of Directors of both companies, a Vanguard subsidiary will merge into Eagle Rock for a common unit consideration of $474 million and assume Eagle Rockās net debt totalling $140 million acquired till March 31, 2015.
The transaction, which is set to be completed by the third quarter of 2015, will be a tax-free unit for unit transaction returning 0.185 Vanguard common units for each Eagle Rock common unit held by unitholders. They will receive a consideration of approximately $3.05 for each Eagle Rock common unit held as per Vanguardās closing price on May 21, 2015.
Management talks
āThe transaction we announced today is another great opportunity for the Company and our unitholders. The assets being acquired are attractive bolt-ons to our Mid-Continent, Permian and Gulf Coast basin operations. Eagle Rock has a meaningful position in the SCOOP and STACK plays which will provide attractive drilling opportunities for the next several years. Considering the previously announced merger agreement with LRR Energy, L.P. (LRE, Financial), we believe that all three companies' unitholders will benefit from a larger, more diversified entity with lower financial leverage and strong positions in several key U.S. basins. The all-unit nature of the transaction will allow Vanguard, LRR Energy and Eagle Rock unitholders to jointly reap the value growth in an improving commodity price cycle,ā Scott W. Smith, Vanguard's President and Chief Executive Officer said in a statement released by the company. While Joseph A. Mills, the Chairman of the Board and Chief Executive Officer of Eagle Rock was confident that, āā¦ the transaction is compelling for Eagle Rock's unitholders by creating a significantly larger and more diverse asset base, an attractive premium and an opportunity to deliver significant value for our combined unitholders in the future. We have been very impressed with the Vanguard team and look forward to working together to successfully combine our two companies.ā
This is the second of Vanguardās acquisitions in a month. Previously, the company took advantage of the current low energy price scenario and acquired LRR Energy LP. This gives Vanguard a favourable take on an upstream master limited partnership or MLP. With the present deal, Vanguard has acquired lightly-averaged assets, short-term investments and an undervalued business struggling with management issues. In January, Eagle Rock was reportedly the best value player in the upstream MLP sector. The two deals give Vanguard a 65% increase in size and it is only after the deals are closed that we can hope to see some improvement in cash flow position and consequent increase in distributions.
Market Reactions
Vanguardās shares reacted positively during trading hours to close up by 3.39% at $16.48. After-hours trade, after the news of the acquisition was announced, saw a further 0.12% climb in share price to surge to $16.50. The company lists itself as a common units limited liability company, purportedly for tax purposes. The common units have surged positively this year with an approximate 36% increase over the last 52 weeks. Eight of 12 analysts polled by Zacks Investment Research give the common units stock a āHoldā rating.
