Pluses and minuses. It’s how Moody’s Investors Service views the $4 billion purchase of Anadarko Petroleum corporation’s midstream assets by Western Gas Partners, LP.
In a report, Moody’s called it a credit negative for Western Gas saying it significantly increases the firm’s financial leverage. But because the acquired assets are close to the partnership’s existing assets combined with contracted cash flow visibility, they limit the company’s risk.
Here’s how Moody’s continued its assessment of the transaction:
WES’s increased scale and exposure to oil production and water volumes will enhance its business profile, while the simplification
of its ownership structure and elimination of incentive distribution rights (IDRs) should increase its retained cash flow and lower its equity cost of capital, credit positives for the partnership once the transactions are completed and the full benefits are realized.
This transaction has not affected WES’ or Anadarko’s Ba1 Corporate Family Ratings and stable outlooks. For Anadarko, the primary effect of the drop down transaction on its credit profile is subject to how it uses the cash proceeds, which are being debt funded at WES. To the extent that the cash proceeds are applied to debt reduction at Anadarko or further investment in its
upstream business the transaction is largely credit neutral. Whereas the use of proceeds for further share repurchases would be credit negative.
WES agreed to acquire substantially all of the midstream assets owned by Anadarko for $4.015 billion. The purchase price will consist of 50% cash and 50% equity in the form of WES common units issued to Anadarko. The cash component will be initially funded by a $2 billion senior unsecured term loan facility. The transaction will increase WES’ debt/EBITDA to almost 5x from under 4x currently.
With Anadarko’s anticipated volume growth in both the Delaware and DJ Basins, the earnings from the acquired assets should bring
WES’ debt/EBITDA down toward 4x by the end of 2019 and under 4x thereafter, consistent with the partnership’s historic leverage levels.
At the same time, WES and its publicly traded general partner, Western Gas Equity Partners, LP (WGP) announced an agreement whereby WGP would acquire the outstanding common units of WES held by third parties and substantially all held by Anadarko in exchange for WGP units. WES will also issue new common units to WGP in exchange for the outstanding WES general partner (GP) units and the cancelation of WGP’s IDRs in WES. Following the acquisition and simplification transactions, WGP will own 98% of WES’ limited partner (LP) interest and Anadarko will own the remaining 2%. Anadarko will continue to control WGP through its ownership of the non-economic GP interest in WGP and it will own 55.5% of WGP’s LP interests, with the rest of WGP’s LP interests publicly held.