Energy Transfer Partners in $17bn deal to take on Regency

Energy Transfer Partners, one of the largest US oil and gas pipeline groups, has agreed a $17bn deal to buy its affiliate Regency Energy Partners, in the latest sign of restructuring in the industry driven by the plunge in crude prices and turbulence in financial markets.

Both groups are structured as limited partnerships and are controlled by a third partnership, Energy Transfer Equity, which owns 21.7 of Regency and 8.7 per cent of Energy Transfer Partners.

The deal is structured principally as an exchange of units, which the partnerships have instead of shares, with a small cash component. It values Regency’s units at about $10.1bn, and ETP will also take on about $6.8bn in debt and other liabilities.

Mike Bradley, Regency’s chief executive, said in a statement that the volatility in commodity prices and more difficult capital markets had made it clear that “Regency needed more scale and diversification, along with an investment grade balance sheet, to continue its growth”.

The deal has been approved by the boards of both partnerships and by their separate conflict committees, the statement said.

ETP’s units fell 5.7 per cent in morning trading to $61.61 after the deal was announced, while Regency’s rose 6.7 per cent to $25.33.

The terms of the deal offer Regency unit holders 0.4066 ETP units plus $0.32 for every unit they own, for a total value of $25.37 at the prevailing prices on Monday.

That value is well below the peak of over $33 that Regency’s units reached last August, but above their recent low of about $22 this month. Regency unit holders will end up with about 34 per cent of the merged group.

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Regency, which operates plants, tanks and pipelines for processing, storing and transporting gas, oil and natural gas liquids — principally in Texas and Louisiana — is not as exposed to movements in commodity prices as oil and gas producers.

However, the fall of more than 55 per cent in US crude prices since June has begun to affect activity, with a steep decline in oil drilling, and analysts have forecast that production growth in the US will slow sharply.

The fall in prices has also driven up yields on the debt of lower-rated oil and gas companies, raising their cost of capital.

Energy Transfer Partners has the lowest investment grade rating at BBB- from Standard & Poor’s, the rating agency, while Regency is junk rated at BB.

The companies said in a statement that after discussion with the agencies, they expected that the takeover would have no effect on ETP’s credit rating.

As part of the deal, Energy Transfer Equity has agreed to reduce the dividends known as incentive distribution rights that it receives from ETP by $320m over the next five years.

The consolidation of ETP and Regency follows a similar move by the Kinder Morgan group last year, in which four businesses are to be combined as a single company, changing three of them from partnerships to a corporation.