More Videos:

Breitburn Energy acquires QR Energy in Deal Valued at $3B

Tickers in this article: BBEP QRE
HOUSTON ( The Deal ) --  Breitburn Energy Partners said Thursday it agreed to acquire QR Energy for $3 billion, creating the largest oil-weighted oil and gas exploration and production master limited partnership.

The deal values QR Energy's equity at $1.6 billion.

Los Angeles-based Breitburn will exchange 72 million of its units for all of QR Energy's common and Class B units at a ratio of 0.9856 of a Breitburn unit for each QRE unit, which works out to $22.48 per unit - a 19% premium over QR Energy's closing price of $18.87 on Wednesday.

The $3 billion transaction value includes QR Energy's debt of around $984 million as of March 31 and outstanding Class C convertible preferred units, the holders of which will get $350 million in cash.

The deal comes with an $80 million breakup fee, Breitburn management said on a conference call with analysts and investors.

Ethan Bellamy, an analyst at Robert W. Baird, said the price is fair to Houston-based QR Energy, but based on a modest 3.5% accretion to Breitburn, QRE holders shouldn't anticipate a material sweetener from here, he noted. However, QR Energy holders will also receive a distribution increase, adding to the attractiveness of the proposal.

"We do not anticipate any problem getting this transaction completed at the current ratio and in the time frame they outlined," he said. "There should not be any HSR or FTC issues, and QRE holders have a nice enough premium here to be satisfied. Both groups of unitholders should be better off in our view with a much more liquid, scaled operation that is better positioned to compete for accretive acquisitions and to high grade their capital portfolio."

The transaction is expected to be tax-free to QR Energy's common and Class B unitholders.

Breitburn's board will expand by one member, with that director agreed upon by Breitburn and QR Energy.

The deal will create an MLP with an enterprise value of $7.8 billion with average daily production of 57,300 barrels of oil equivalent, 67% of which is liquids.

Breitburn said the combination enhances its ability to generate greater cash flow and creates significant incremental near-term and long-term value for unitholders, including accretion to distributable cash flow per unit when the deal closes.

The acquirer has agreed to recommend to its board a distribution increase to $2.08 per unit per year.

Breitburn CEO Halbert Washburn said in a statement that QR Energy is a company that it has always admired given its enviable MLP-friendly assets and engineering-focused operating strategy that's similar to its own.

"This world-class portfolio of conventional properties in large, oil-rich basins fits perfectly with our asset base and improves our ability to deliver shallow, predictable decline rates that generate industry-leading margins," he said.