Radnor firm buys pipeline company in $1B deal

Penn Virginia Resource Partners L.P., a Radnor energy company that traces its Philadelphia roots back 130 years, on Tuesday made a major move into the Marcellus Shale natural gas region with the acquisition of a pipeline company for $1 billion.

PVR agreed to buy Chief Gathering L.L.C.'s pipeline system, which performs the largely invisible but lucrative chore of collecting gas from individual wells and delivering it to the nationwide pipeline network. The deal decisively moves PVR away from coal, where it historically made its money, and into natural gas.

William H. Shea Jr., chief executive officer of the company's general partner, Penn Virginia Resource G.P., told analysts in a conference call that the deal "catapults" the company into the "midstream" pipeline business, where pipeline owners can earn steady profits collecting transportation fees like tolls on a highway.

"We now have a critical mass and a strategic footprint in the Marcellus Shale," Shea said. The acquisition, backed by private equity, doubled the Radnor company's market value to nearly $2 billion.

Investors reacted positively. On a day when the broader market sank, PVR's partnership units closed at $24.95, up $2.59, or 11.6 percent, on the New York Stock Exchange.

The deal is the second big move in six weeks by a Philadelphia area company into the business of transporting natural gas from the Marcellus Shale region. In March, UGI Corp. of Valley Forge announced that it would join two other companies to build a 200-mile, $1 billion interstate pipeline to carry shale gas from northern Pennsylvania south to markets in Philadelphia, Baltimore and Washington.

Gas-well production has boomed since 2008 in the Marcellus, which underlies five states, including Pennsylvania, where a new law governing gas development goes into effect on Saturday that would impose an impact fee on shale-gas wells.

But hundreds of completed wells are capped or "shut-in," awaiting "midstream" companies to build gathering systems to connect them to the nationwide pipeline network.

According to a recent Inquirer series that examined the boom in pipeline construction, the rural gathering systems in the shale gas regions are largely unregulated by federal or state pipeline agencies, even though they carry huge amounts of gas under high pressure similar to regulated interstate pipelines.

Chief Gathering's assets include six natural gas gathering systems serving more than 300,000 acres in Bradford, Lycoming, Sullivan, Susquehanna, Wyoming, and Greene Counties in Pennsylvania and Preston County, W. Va.

Chief Gathering is also building a new trunk line extending from northern Wyoming County to Luzerne County, feeding gas to the Transco interstate pipeline, which carries the fuel to Northeastern markets.

PVR currently owns two gathering systems in Lycoming and Wyoming Counties, with a third system in development in Susquehanna County.

Chief Gathering is affiliated with Chief Oil & Gas Co., a private Dallas exploration company founded by Trevor Rees-Jones. Chief will be receiving $200 million in restricted PVR shares, which can't be traded for 18 months, and $800 million in cash, which PVR is raising through private equity issues and $220 million of borrowing.

Chief's wells in northern Pennsylvania will also be tied in to the system, so the drilling company will continue to be a pipeline customer.

Shea said the acquisition was attractive because Chief's long-term contracts with producers were structured to generate steady fees, regardless of the market price of natural gas. PVR's current pipeline revenue is tied more to the price of natural gas, which is currently trading at its lowest price in a decade because of an oversupply.

Although some exploration companies are slowing down drilling because of low prices, PVR officials said they were confident of their growth forecasts because Chief's gathering systems are tied to some of the nation's most proficient natural gas wells, operated by producers such as ExxonMobil Corp., Chevron Corp., Chesapeake Energy Corp. and Anadarko Petroleum Corp.

"We're talking big producers here," said Shea.

Penn Virginia Resources was spun off in 2001 from Penn Virginia Corp., which was founded in 1882 by businessman John Leisenring Jr.

While Penn Virginia Corp. continues to operate as an independent exploration company, Penn Virginia Resources L.P. took over the company's ownership interests in coal - it leases its mineral rights to producers and collects royalties - as well as pipeline operations.

Coal royalties currently account for 63 percent of PVR's cash flow, but Shea expects pipelines will account for 75 percent of revenue by the end of 2013. The domestic market for coal is in long-term decline as more electricity generators switch to cleaner-burning natural gas to comply with environmental regulations.

Shea said the move into natural gas pipelines has been his objective since he took over as PVR's chief executive in 2010 and "we recognized then this was where the bulk of the opportunities would be going forward." Shea led Buckeye Partners L.P., a refined petroleum products pipeline partnership, before he joined PVR's board in 2007. PVR's board also includes Robert J. Hall, chief operating officer of Philadelphia Media Network, The Inquirer's owner.

"While I like coal," Shea said, "I recognize it's going to be difficult if not impossible to grow in the coal business. In fact, we're not focusing on it. We're going to focus on the midstream side of the business."

Read more of The Inquirer's coverage of Marcellus Shale drilling at www.philly.com/

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