Penn Virginia Resource Partners, L.P. (PVR) has completed the acquisition of Chief Gathering LLC, a midstream natural gas gathering and processing unit of Chief E&D Holdings, L.P for $1.06 billion. Penn Virginia had entered into the acquisition agreement in April 2012.
Chief Gathering's portfolio consists of six natural gas gathering systems. It is active over 300,000 acres in Bradford, Lycoming, Sullivan, Susquehanna, Wyoming and Greene Counties in the state of Pennsylvania, and Preston County in West Virginia. The company is also setting up a new 750 million cubic feet per day (“MMcfd”) trunkline from northern Wyoming County to Luzerne County, with a link to Transco's interstate pipeline. This new pipeline is expected to be on line in the third quarter of 2012.
The acquisition amount will comprise a cash consideration of $850 million and an offering of 10.35 million units of a new class of Penn Virginia limited partner interests. Penn Virginia had earlier used a combination of equity and debt issuances to meet its cash requirements.
We view the Chief Gathering acquisition as a positive move, with respect to Penn Virginia’s midstream operations. This acquisition will enable the partnership to become a strong midstream service provider in the natural gas-rich Marcellus Shale and Granite Wash regions. Addition of trunkline and gathering systems will help the partnership to provide smooth and uninterrupted service and meet the customer’s midstream requirements.
Apart from midstream pipeline expansion, this transaction will create cost and operating synergies for Penn Virginia by linking it with both the Transco and Tennessee interstate pipelines. This will help to gather additional volume from two of the low cost natural gas production regions in the U.S.
Penn Virginia’s last few transactions have made it evident that the partnership is continuously strengthening its pipeline portfolio. In January 2012, it had acquired an option to purchase a pipeline easement in Susquehanna County, including a 28.8 mile corridor in the Marcellus Shale. This transaction is expected to help the partnership to serve several producers in the region.
The Chief Gathering acquisition will substantially boost Penn Virginia’s midstream capacity. This acquisition will add 235 MMcfd transportation capacity to Penn Virginia’s present capacity of 211 MMcfd in the Marcellus shale area. Besides, Chief Gathering’s 750 MMcfd trunkline is expected to come into operation during the third quarter of 2012, adding another 255 MMcfd in 2012, and subsequently increasing to 355 MMcfd in 2013.
Penn Virginia’s decision to expand its pipeline operation bodes well with the enhanced exploration and production activities in the region. Besides, we also believe Penn Virginia will reap the benefit of Chief Gathering’s fee based agreement with larger oil and gas producers like Chesapeake Energy Corporation (CHK), Anadarko Petroleum Corporation (APC), Chevron Corporation (CVX) and Stateoil ASA (STO), operating in the region.
At the end of first quarter 2012, Penn Virginia failed to meet our expectations due to a decline in coal royalty volumes and lower natural gas prices. But, we believe that the partnership’s continued investments for expansion of its domestic operations, including the Marcellus, Panhandle and Antelope systems will act as a positive catalyst for its near-term top and bottom-line growth.
Penn Virginia Resource Partners, L.P. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Based in Radnor, Pennsylvania, Penn Virginia Resource Partners, L.P. is involved in the management of coal and natural resource properties and gathering and processing of natural gas in the United States.
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