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The News That Rocked Investors in Eagle Rock Energy Partners L.P.

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Eagle Rock Energy Partners  (NASDAQ: EROC  )  announced last night that it was suspending its distribution. This was clearly not news that the company's investors wanted to hear, and shares were down by 15% in morning trading. Let's look at what happened and what investors can expect from the company in the future.

Transformation on pause
Eagle Rock Energy Partners is on the path to becoming a pure-play upstream energy company alongside peers such as BreitBurn Energy Partners (NASDAQ: BBEP  ) . However, it first must complete the sale of its midstream business to Regency Energy Partners (NYSE: RGP  ) . That deal hit a snag when the Federal Trade Commission requested additional information and documents. In order preserve liquidity while it waits to close the deal, Eagle Rock made the tough choice to suspend its distribution.

The master limited partnership's plan is to hold a unitholder vote next week to approve the sale of its midstream segment to Regency Energy. However, it is still waiting for approval from the FTC before that deal can close. Because the time frame is now extended, the company needs to preserve liquidity so that it can fund its growth capital spending plan and meet other financial obligations. Meanwhile, the company's debt is piling up, which could force it to seek amendments to its credit facility.

The light at the end of the tunnel
There are two pieces of good news in the midst of the disappointing distribution suspension. First, the company plans to resume distributions as soon as the midstream business is sold. Furthermore, its underlying operations are showing some improvement. The company said in a press release that first-quarter results for adjusted EBITDA and distributable cash flow should be slightly above what it reported in the preceding quarter.

Once the midstream deal closes Eagle Rock Energy Partners will see a vast improvement in its liquidity position and its total debt balance. That will enable the company to focus all of its attention on becoming a pure-play production company. It will then be able to better compete with the likes of BreitBurn Energy Partners for accretive oil and gas acquisitions. As with BreitBurn, the company can also invest to organically grow production.

While BreitBurn is focusing its organic growth in the Permian Basin, Eagle Rock has a compelling position in the liquids-rich areas of Oklahoma, as the following slide shows:

Source: Eagle Rock Energy Partners Investor Presentation (Link opens a PDF).

Eagle Rock Energy Partners' promising position consists of about 16,500 net acres in two areas that are now being developed horizontally. This position is the near-term key to the company's ability to produce a stable and growing distribution for its investors. In the meantime, Eagle Rock needs to preserve capital so that it can fund growth in Oklahoma as it waits for the capital from the midstream sale to Regency Energy Partners.

Investor takeaway
While the distribution cut at Eagle Rock Energy Partners is tough for investor to take, it is necessary. The good news is that there is a light at the end of this tunnel. Completing the midstream deal will give the company the capital to fund its liquids-rich growth in Oklahoma, as well as to begin making accretive acquisitions. That said, while the suspension isn't the end of the world, there are better companies to own in this space. 

Your guide to better energy dividends
Record oil and natural gas production is revolutionizing the United States' energy position. However, as Eagle Rock Energy Partners investors have discovered not all energy companies can help them profit from the boom. Some companies are just in a better position to consistently growing distributions. To learn more about the best energy MLPs check out our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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  • Report this Comment On April 24, 2014, at 2:06 PM, zorro6204 wrote:

    Nice to see someone writing rationally about today's move!

  • Report this Comment On April 24, 2014, at 2:35 PM, arbtrdr wrote:

    Zorro - This is really old news. RGP made the buy agreement in 2013! Part of that included a provision that EROC could not pay distributions declared after the planned closing date circa 3/14. EROC has moved up and down a lot lately as it is hard to figure out what EROC will look like going forward. It could be worth anything from $2 to $6. But the selloff from suspending the distribution is uninformed people. It was already agreed to last year.

  • Report this Comment On April 24, 2014, at 3:45 PM, zorro6204 wrote:

    I didn't know that, but I don't see the suspension as any big deal, certainly not enough to justify the capitulation we're seeing. I'm buying units and calls here in partial tranches, hoping for more selling tomorrow as the news spreads to retail guys.

    I think it's worth more than $4, the debt will be very low after the deal, and they have the $200M in Regency units plus the upstream stuff, and dry powder to get a lot more. Probably after the dust settles $6 could be a reasonable number, but I won't see that, I'm just in to wet my beak and I'm gone. Probably right after the Regency deal gets clearance.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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