April 10, 2012 / 4:24 PM / 5 years ago

UPDATE 3-Penn Virginia Resource eyes big customers with $1 bln deal

* To buy pipeline company Chief Gathering LLC

* To add customers with ability to continue gas drilling

* Deal to close in Q2

* Penn Virginia shares rise 13 percent

By Swetha Gopinath

April 10 (Reuters) - Penn Virginia Resource Partners LLC said it will buy pipeline company Chief Gathering for $1 billion to add customers who are expected to continue drilling in the gas-rich Marcellus shale field despite decade-low prices for the fuel.

Natural gas prices have remained weak in the last two years, forcing companies such as Chesapeake and Encana to shut in some gas output or trim spending on “dry gas” fields and focus on oil and natural gas liquids.

“The areas where we intend to acquire the assets are very prolific and they continue to be actively developed by producers even in a low price gas environment,” Stephen Milbourne, Penn Virginia’s director of investor relations, told Reuters.

Chief Gathering, owned by Chief E&D Holdings, counts active Marcellus producers such as Anadarko Petroleum, Statoil , Enerplus and Chevron as customers.

All of Chief Gathering’s pipeline contracts in the Marcellus shale are fee based, which means commodity price fluctuations do not directly affect revenue.

As of last year, only a third of Penn Virginia’s natural gas gathering contracts were fee based, making it vulnerable to any swing in prices.

In a regulatory filing, Penn Virginia said it will recognize an impairment of its natural gas gathering properties located in the Fort Worth Basin of Texas, due to “continuing market declines of natural gas prices and lack of drilling in the area.”

The company, which also manages coal properties, will take a charge of about $115 million to $130 million in the first quarter.

Penn Virginia shares rose as much as 15 percent to $25.65, their highest in a month and a half on Tuesday on the New York Stock Exchange. The stock has lost about 11 percent of its value this year.

MORE DEALS?

Penn Virginia said Chief Gathering’s six gathering systems -- which connect wellheads with processing facilities or a main pipeline network -- serve 300,000 acres in the Marcellus Shale and are complementary to its existing footprint.

The shale, one of the biggest U.S. gas fields, has already seen a number of deals as companies look to tap the rising need for shipping the fuel out to customers. Last month, Williams Cos struck a $2.5 billion deal in the area.

More such deals can be expected, said Judd Cryer, a senior vice president at Swank Capital, whose Cushing MLP Asset Management holds a 1.42 percent stake in Penn Virginia.

The company expects its midstream business to account for almost 75 percent of its earnings before interest, taxes, depreciation and amortization (EBITDA) by the end of 2013, up from 40 percent to 45 percent now.

RBC Capital Markets advised Penn Virginia, which said it would part-fund the transaction by selling units to entities affiliated with private equity firm Riverstone.

The deal with Chief Gathering is expected to close in the second quarter.

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