Regency Energy Partners Strikes Two Deals to Close Out 2013

Regency Energy Partners (NYSE: RGP  ) made headlines on Monday when it announced it would acquire the midstream assets of the beleaguered master limited partnership Eagle Rock Energy Partners (NASDAQ: EROC  ) . My Foolish colleague Matt DiLallo has a nice write-up from EROC's perspective, but today's focus is on Regency. The partnership has inked several major deals this year in addition to Monday's announcement, and investors are wondering if it may finally be worthy of their attention.

Background on Regency
Coming into 2013, Regency Energy Partners was the red-headed stepchild of the Energy Transfer family. Its general partner is Energy Transfer Equity (NYSE: ETE  ) , but it receives nowhere near the investor attention as Energy Transfer Partners (NYSE: ETP  ) , based both on average trading volume and media coverage. With a market cap of $5.5 billion, it commands a market presence roughly one-third the size of ETP.

From an operational standpoint, its assets are focused in the mid-continent region, Texas, and Louisiana, consisting primarily of gathering and processing infrastructure, as well as natural gas and NGL transportation and storage.

Buy and grow
Regency kicked off the year with its acquisition of Southern Union Gathering, a $1.5 billion deal announced in February that closed in April. The deal brought Regency a 5,600-mile natural-gas-gathering system in the Permian Basin, along with processing facilities with a capacity of about 500 million cubic feet per day.

After a quiet few months, Regency's growth spurt really began in October with its megadeal to acquire PVR Partners. The $5.6 billion deal gave Regency a foothold in the Marcellus Shale, as well as important assets in the Texas panhandle.

Which brings us to Monday's two deals. Beginning with the smaller deal, Regency announced it planned to acquire the midstream assets of Hoover Energy for $290 million. Hoover's footprint is in the Delaware Basin area of West Texas and is comprised of crude-oil gathering and transportation, as well as natural-gas gathering and processing. Significantly, it also includes the area's only open-access water gathering and disposal system.

The biggest news, however, was Regency's $1.3 billion acquisition of Eagle Rock Energy Partners' midstream assets. Shares popped close to 10% on the news, as the partnership picked up 8,100 miles of gathering pipeline, as well as processing capacity of 800 million cubic feet per day. Management expects the acquisition to trigger 6% to 8% distribution growth in 2014, which is very likely what drove the stock higher.

Long-term outlook
Regency's distribution guidance is especially intriguing right now. In its most recent quarter, the partnership posted a mere 3% distribution increase, year over year, which was very near the lowest increase out of every MLP that posted one. In the same vein, it has only increased its distribution for two straight quarters, which means many investors likely passed on Regency in an effort to find growth and consistency elsewhere.

Going forward, the one aspect of the new and improved Regency I would watch closely involves the Eagle Rock assets. Only 40% of the gross margin derived from the new infrastructure is fee-based, which is not ideal. In contrast, the majority of gross margin was fee-based in the PVR acquisition, which lends itself well to long-term stability. When this deal closes, Regency's gross-margin exposure to commodity risk will grow from 22% to 27%. That isn't the end of the world, by any means, but it is less than ideal. A transition to a higher percentage of fee-based cash flow is possible -- in fact, PVR Partners did it quite successfully -- but we will have to wait and see for now.

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