Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Units of Eagle Rock Energy Partners, L.P. (NASDAQ: EROC) jumped nearly 14% in early morning trading after it announced that it would be acquired by Vanguard Natural Resources, LLC (NASDAQ: VNR). The deal is a unit-for-unit exchange whereby Vanguard is acquiring Eagle Rock for $474 million plus the assumption of $140 million in debt. The deal represents a 24% premium to Eagle Rock's prior trading price, suggesting that there's more upside ahead.
So what: The merger provides several benefits to the unit holders of both companies. It significantly expands the asset base of the combined company and boosts Vanguard's production by 20% and proved reserves by 16%. The deal is also is expected to drive material operating and cost synergies, as well as put the company in a stronger financial position as it will improve Vanguard's credit metrics. Finally, it is expected to be accretive to Vanguard's cash flow starting next year, which will further strengthen the combined company's distribution.
This is Vanguard's second acquisition of a fellow upstream MLP in the past month as it is also acquiring LRR Energy LP (NYSE: LRE) in a unit-for-unit deal. Vanguard is clearly taking advantage of the downturn in oil market to acquire smaller rivals to improve its scale so that both companies are in a better position to weather the storm in commodity prices. This is because the greater scale should really help the company improve its margins, which is critical in a low commodity price environment.
Now what: Because this is a unit-for-unit exchange Eagle Rock Energy Partners' investors can still participate in the upside of the soon to be much larger Vanguard. That upside could be substantial as the exchange is for $3.05 per unit, which is well above the company's current trading price. Further, once both acquisitions close the combined company will be well positioned to thrive should commodity prices begin to meaningfully improve in the years ahead.
