Natural gas explorer and producer EQT Corp. made a big acquisition, but it wasn't the one some had expected.
In January, hedge fund Chapter IV Investors urged the company to merge with other companies in the Marcellus Shale, the large natural gas play that stretches from West Virginia to New York state. It noted such potential targets as Antero Resources Corp. and Range Resources Corp., which it thought would give EQT a better exploration and production business and more growth for its midstream, or infrastructure, business. "We think....[it's] an incredibly compelling opportunity that should be explored," the fund's founder W. Barnes Hauptfuhrer wrote in a letter to EQT's board.
Instead, EQT went after smaller Rice Energy Inc. with an offer of $6.7 billion in cash and stock. The deal will make it the largest natural gas producer in the U.S. -- and thus is a big bet on the low-priced commodity eventually rising with increasing demand from utilities and industrial customers. The transaction also provides a nice payday for the Rice family and Rice Energy's private equity investors.
Raymond James analyst John Freeman said the purchase values Rice's natural gas properties at around $17,000 per acre. Gabriele Sorbara, who follows the company at Williams Capital Group, puts the figure at more like $9,900 per acre if valuing the midstream assets included in the deal at $1.8 billion, "roughly in line with core acreage valuations over the past year."
The Marcellus has been a hotbed of deals so far this year, at least on the midstream and services side. Noble Energy sold its midstream assets in the area to a company backed by private equity firm Quantum Energy Partners last month for $765 million. And Mammoth Energy Services closed its acquisition of service companies from Gulfport Energy, Rhino Exploration and Wexford Capital earlier this month for an estimated $134 million.
EQT has also been cherry-picking assets, including some from bankrupt Stone Energy Corp. in February for $527 million.
EQT's move to buy Rice could spur other deals in the area. A Range-Antero hookup has been mentioned as a possibility. Some have thought such wounded companies as Warren Resources Inc., Rex Energy Corp. and Eclipse Resources Corp. could also be picked up.
Cabot Oil & Gas has a large acreage position in the Marcellus, as do Southwestern Energy and Consol Energy. Privately held companies that are also big there include billionaire Trevor Rees-Jones' Chief Oil & Gas, which has sold off some of its properties to larger companies over the years (keeping the ones in prolific northeastern Pennsylvania), and Bregal Energy-backed Inflection Energy.
Consolidation has been needed in the industry, which would benefit from improved economies of scale given low natural gas prices. It will be interesting to see if anyone follows EQT's lead.
