By Dow Jones Business News, October 21, 2013, 01:44:00 PM EDT
By Alison Sider and Tess Stynes
Devon Energy Corp. ( DVN ) and Crosstex Energy L.P. ( XTEX ) unveiled plans to combine Devon's midstream operations with
Crosstex to form a publicly traded master limited partnership that will combine the companies' pipelines, processing
plants, rail terminals and other oil and natural gas infrastructure.
Earlier this year, Devon proposed dropping many of its midstream assets into an MLP structure, but that idea was not
well received by the market. This combination with Dallas-based Crosstex, which operates 3,500 miles of pipelines at the
Gulf Coast and in the Ohio River Valley as well as gas processing facilities and rail and barge terminals for oil, gives
Devon reach across productive U.S. oil fields.
The combined Devon and Crosstex entity would operate 7,300 miles of pipelines and storage assets across the Barnett
Shale in North Texas, the Cana and Arkoma Woodford shales in Oklahoma and along the Gulf Coast.
MLPs are a tax-advantaged corporate structure favored by some companies that own pipelines and other oil and gas
storage and transportation assets. The publicly traded partnerships have flourished in recent years and are highly
sought by investors. They avoid most corporate taxes because the overwhelming majority of cash they generate every
quarter is paid out in distributions to unit holders.
The new business, which does not yet have a name, will consist of two publicly traded companies: a general partner and
a master limited partnership. Devon will have a controlling stake in both of them. In exchange, Devon will contribute
its equity interest in a newly formed Devon subsidiary and $100 million in cash to the entities. Crosstex shareholders
will receive shares of the new general partnership and a cash payment.
Devon first looked into spinning off its pipeline and processing assets in 2007 before revisiting the idea earlier
this year. In June, Devon said it planned to create its own MLP, but Chief Executive John Richels said Monday that the
combined company will be a better deal for shareholders.
"It's an epic deal," said RW Baird analyst Ethan Bellamy. "Devon is getting out of the gates on their midstream
standalone business much bigger and stronger and potentially at investment-grade status right away," he said, adding the
combination is also "fantastic" for Crosstex.
Bigger is often better for master limited partnerships, which find themselves in an increasingly competitive field
when they bid for new assets they need to keep cash distributions growing. That has fueled a wave of consolidation in
the industry. Earlier this month Crestwood Midstream Partners completed a merger with Inergy Midstream Partners, and
then bought a privately held midstream company in a $750 million deal.
The Devon-Crosstex combination will be larger and more formidable than Devon's midstream assets would be in their own
company. Devon said it expects the new business to bring $700 million in adjusted pretax earnings in 2014, compared to
the $425 million it had expected a standalone MLP to generate.
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