Vanguard Natural Resources (ticker: VNR) announced on April 20th that the company had entered into a purchase and sale agreement to acquire LRR Energy (ticker: LRE) for a total of $539 million.
The purchase price includes $251 million in equity and $288 million in debt. The transaction will be an exchange of common units, where LRE unitholders will receive 0.55 units of VNR which correlates to a purchase price of $8.93, a 13% premium above the current share price.
An additional 12,320 units of VNR will be exchanged to LRE’s general partner. Pending the approval of each company’s Board of Director’s, the transaction is set to close in Q3 of 2015.
Raymond James analyst Kevin Smith summarized the transaction as follows: “The deal was relatively expensive for VNR, as we estimate that it paid between 7.5-9x EBITDA for LRE under 5-year NYMEX strip pricing or the RJ long-term price deck (expect this to decrease as G&A synergies are realized). On the plus side, we calculate that the deal was slightly accretive, and will also help Vanguard lower its leverage ratio from 5.4x to 4.8x. The deal will initially be funded under VNR’s revolving credit facility, though we wouldn’t be surprised if it were ultimately equity financed. Bottom line: VNR paid a rich multiple for LRE, but the transaction should help improve leverage moving forward.”
According to EnerCom Analytics’ “MLP Scorecard” weekly MLP report, LRE was trading at 7.9x multiple of EV to TTM EBITDA on April 17th before the deal was announced.
Adding Acreage and Producing Wells in Arkoma and Permian
Vanguard Natural resources will use this deal to expand its footprint in the Arkoma and Permian basins where the company currently holds a combined 280,264 net acres as of December 31, 2014. LRR Energy’s properties are located in the Permian Basin region of West Texas and southeast New Mexico, as well as the Mid-Continent region in Oklahoma and East Texas. VNR will receive 1,290 gross producing wells over approximately 158,000 net acres, with roughly 48% of LRE’s assets that are currently in the Permian Basin.
This will increase VNR’s position in these two basins to approximately 438,264 net acres, with the new acreage accounting for 36% of that position.
Abhishek Sinha of Wunderlich Securities commented: “We believe LRE assets are an attractive bolt-on to VNR’s existing footprints in the Permian and Arkoma basins and provide an inventory of development projects that generate good returns at the current strip.”
Looking at the Deal Valuation through Different Lenses
Utilizing the Exploration & Production MLP peer set in the EnerCom “MLP Scorecard,” one can quickly analyze the value of the deal in terms of production and reserves. Using each company’s enterprise value as of Friday April 17, 2015, and their TTM production numbers and reserves reported as of 12/31/2014, the group average for EV to Production on a $/Boepd basis is $187,000/Boepd, whereas the transaction values LRE at $221,500 /Boepd. This represents an 18% premium to the peer average.
The reserve numbers are an even bigger jump. The EV to Reserves on a $/Boe basis for the peer set is $12.31/Boe. The VNR acquisition occurred at the $15.93/Boe which equates to a 29.43% premium to the peer set.
Overall, this acquisition is beneficial for VNR due to the decrease in leverage and the potential accretion that can come from G&A synergies that will reduce costs for VNR as a whole. VNR remains in a good position and has a good dividend coverage ratio.
However Raymond James warns not to expect a bump in distributions. “While we expect Vanguard to generate healthy distribution coverage ratios over the next two years, given the uncertainty surrounding oil and gas prices plus Vanguard’s relatively high leverage, we are not modeling a distribution increase at this time.”
Expensive or Not?
“Expensive” is in the eye of the beholder. MLP assets are generally targeting low-risk producing assets with upside of development drilling. Just based on the nature of this type of asset and a potential acquirer’s comfort on future repeatability, premium valuations, when compared to non MLP counter parts, are expected.
With respect to premiums assigned to other recent corporate buy-outs, we note that Shell’s offer to purchase BG Group announced earlier this month was proposed for a 50% premium to closing share price on April 7, 2015, and a 52% premium if the 90-day average trading price is considered.
We also note the Whiting Petroleum (ticker: WLL) $6.0 billion purchase of Kodiak Oil & Gas on December 8, 2014 represented a 5% premium at the time.
The current enterprise value of LRE as of April 17 was $530 million.
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