PVR’s asset footprint complements Regency’s
Regency management stated that PVR’s assets complemented Regency’s existing portfolio. While Regency’s existing assets are concentrated in the Eagle Ford (South Texas), the Permian (West Texas), and the Haynesville or Cotton Valley (North Louisiana), PVR’s assets are primarily in the Marcellus (Appalachia) and Granite Wash or Mississippi Lime (Midcontinent, Oklahoma, and North Texas). The combined entity has substantial geographic diversity and exposure to most of the major hydrocarbon plays in the US (with a notable exception being the Bakken Shale in North Dakota and Montana).
The combined entity has a lower cost of capital
Plus, on a call discussing the acquisition, management noted that the combined company would be able to more cheaply access capital. PVR Partners CEO William Shea stated, “The combined entity will be about $15 billion in enterprise value, which will make it competitive in the marketplace and allow it to grow more easily than PVR could have done on a standalone basis. The size will allow better access to less costly capital so that the current growth projects and the backlog of growth projects can be financed in the most advantageous way. The lower cost of capital, which I would anticipate, will improve the expected returns on the PVR growth projects going forward.”
This is because the larger, more diversified pro forma company would likely be seen as a less risky investment than either of the two companies on a separate basis. Given that this is an all-stock acquisition and that the combined entity will be larger and more diversified, credit rating agencies are likely to view this in a positive light. The combined entity could receive a ratings upgrade—especially as it executes on its organic growth projects and sees growing cash flow. Generally, higher-rated companies have a lower cost of debt funding. The larger, more diversified entity could also enjoy a lower cost of equity funding.
The cost of capital is especially important for master limited partnerships. They often have to rely on outside funding to fund growth capex, as the structure of MLPs directs the majority of excess cash flow to unitholders through distributions.