EQT to be largest U.S. gas driller on $6.7 billion Rice buy

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EQT Corp. will become the largest U.S. natural gas producer after agreeing to buy Rice Energy Inc.’s holdings in the hydrocarbon-rich Marcellus shale formation for about $6.7 billion in cash and stock.

The Appalachian driller will acquire all outstanding shares of Rice common stock for 0.37 shares of EQT stock and $5.30 in cash per share of Rice stock, the companies said in a statement Monday.

That represents a 37 percent premium to Rice’s closing price on Friday. EQT will also assume about $1.5 billion of net debt and preferred equity. The transaction is expected to close in the fourth quarter.

The Marcellus shale in Appalachia has become the most prolific U.S. gas-producing region, with deal interest accelerating as new pipelines promise to end transportation bottlenecks.

Combined first-quarter output for EQT and Rice was about 3.1 billion cubic feet of gas per day, according to company statements, exceeding U.S. production by Exxon Mobil Corp. and Chesapeake Energy Corp., according to company reports compiled by Bloomberg.

“Now that we’re seeing the Marcellus starting to mature, you’re seeing more and more people really start to integrate a lot of their operations, to grab large swaths of acreage as we go into full development mode,” William Foiles, a New York-based analyst for Bloomberg Intelligence, said by phone Monday.

Closely held Alta Marcellus Development LLC agreed to buy $1.24 billion of assets from Anadarko Petroleum Corp. in December, Williams Cos.’s master limited partnership agreed to swap Texas assets for a bigger position in the Marcellus in February and Quantum Energy Partners LLC agreed to buy Noble Energy Inc.’s stake in a gas pipeline business in May for $765 million.

EQT has acquired more than 485,000 acres in the Marcellus shale since early 2016, Chief Executive Officer Steven Schlotterbeck said in the statement. Most of the acquired acreage is contiguous with EQT’s existing assets, and it anticipates a 50 percent increase in average lateral lengths for future wells in Pennsylvania’s Greene and Washington Counties.

“We will now shift our focus from acquisitions to integration as we work to drive higher capital efficiency through longer laterals,” Schlotterbeck said. Analysts should model $100 million to $200 million a year in savings, he said on a Monday call.

EQT shareholders will own 65 percent of the combined company, RBC Capital Markets analysts led by Scott Hanold wrote in research published Monday. The price paid for Rice implies a long-term natural gas price of about $3 per thousand cubic feet, providing "accretive long-term value,” according to the research.

“This fits entirely with what we were hoping would get done,” said Barnes Hauptfuhrer, the founder of Charlotte-based Chapter IV Investors LLC, who wrote an open letter to EQT in January urging it to merge with either Antero Resources Corp. or Range Resources Corp. “You can just substitute Rice for Antero or Range in that letter. A lot of the same synergies come into play.”

Midstream Assets

EQT will also obtain Rice’s midstream assets, including a 92 percent interest in Rice Midstream GP Holdings LP, which owns 100 percent of the general partner incentive distribution rights, and 28 percent of the limited partner interests in Rice Midstream Partners LP, and the retained midstream assets currently held at Rice.

EQT intends to sell the Rice midstream assets to its EQT Midstream Partners LP affiliate beginning early next year, Chief Financial Officer Robert McNally said on the call. Those are expected to be worth more than $1 billion, he said.

Shares of Rice rose 26 percent to $24.88 at 12:23 p.m. in New York. EQT fell 7.7 percent to $54.24.

Citigroup Inc. was EQT’s financial adviser while Barclays Plc advised Rice. Legal advisers were Wachtell, Lipton, Rosen & Katz for EQT and Vinson & Elkins LLP for Rice.

© 2017 Bloomberg L.P

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