EQT Corp. (EQT) has announced it will acquire Rice Energy (RICE) for approximately $6.7 bln in cash and stock. Specifically, RICE shareholders will receive 0.37 shares of EQT stock plus $5.30 in cash. EQT will also assume or refinance approximately $1.5 bln of net debt and preferred equity. The transaction is expected to close in 4Q17. The boards of directors of both companies have unanimously approved the transaction.
Since you may not be familiar with these companies, a little background would help. EQT is an integrated energy company with emphasis on Appalachian area natural gas production, gathering, and transmission. EQT is a leader in the use of horizontal drilling technology. EQT also owns a 90% limited partner interest in EQT GP Holdings, which owns the general partner interest, all of the incentive distribution rights, and a portion of the limited partner interests in EQT Midstream Partners (EQM). Rice Energy Inc. is focused on the exploration of natural gas and oil in the Appalachian Basin.
In terms of the rationale for the deal, this transaction brings together two of the top Marcellus and Utica producers to form a natural gas operating position that will be unmatched in the industry. Rice has built what EQT describes as an outstanding company with an acreage footprint that is largely contiguous to EQT's existing acreage, which will provide substantial synergies and make this transaction significantly accretive in the first year.
Since the beginning of 2016, EQT has added more than 485,000 acres to its development portfolio and has achieved significant scale in the core of the Marcellus. EQT will now shift its focus from acquisitions to integration as it works to drive higher capital efficiency through longer laterals; reduce per unit operating costs through operational and G&A synergies; improve its sales portfolio by expanding access to premium markets etc.
As the vast majority of the acquired acreage is contiguous with EQT's existing acreage position, EQT anticipates a 50% increase in average lateral lengths for future wells located in Greene and Washington Counties in Pennsylvania. This same land synergy also complements the infrastructure footprint of EQT Midstream Partners (EQM), where growth opportunities are expected through drop-downs and additional organic projects. Already a leading producer in the Appalachian Basin, this acquisition will make EQT the largest natural gas producer in the US
EQT will also obtain Rice's midstream assets, including a 92% interest in Rice Midstream GP Holdings, which owns 100% of the general partner incentive distribution rights and 28% of the limited partner interests in Rice Midstream Partners (RMP), and the retained midstream assets currently held at Rice. The retained midstream assets, which EQT intends to sell to EQM in the future through drop-down transactions, are expected to generate approximately $130 mln of EBITDA in 2018.
RICE says natural gas is the key to a cleaner energy world; and the combination of Rice and EQT -- two of the largest, lowest-cost, and most responsible natural gas producers -- creates an unparalleled leader in shale gas development that will benefit the environment and shareholders for many decades to come.
In sum, this deal seems to make sense for both parties. EQT is picking up some prime acreage that is right next to its current acreage. And RICE has seen its stock price be under pressure for much of the past year so this deal provides shareholders with a nice premium.