EQT Corp., the largest natural gas producer in the United States, agreed Monday to buy former entity Equitrans Midstream Corp., bringing back together Appalachian-based giants in what executives said was a game-changing opportunity.
The all-stock transaction, estimated Monday at around $5.5 billion, would hold 27.6 Tcfe of proved reserves across nearly two million net acres. Net production would be around 6.3 Bcfe/d net, with 8 Bcfe/d-plus of gathering throughput across 3,000-plus miles of pipeline.
EQT in 2018 had spun off Equitrans to focus on exploration and production. The all-stock merger on Monday was valued at around $5.5 billion, and it carries an enterprise value estimated at $35 billion.
“As we enter the global era of natural gas, we believe it is imperative for U.S. natural gas companies to evolve their business models to compete on the global stage against larger, fully integrated rivals,” CEO Toby Rice told investors during a conference call to discuss the transaction.
A “common theme” in the upstream acquisition activity undertaken by EQT has “included midstream ownership, which was by design, as we recognized early on the strategic value associated with owning integrated midstream infrastructure.”
Once the purchase is completed, around 90% of the operated natural gas production would flow through “EQT-owned midstream assets, creating unrivaled margin enhancement relative to the rest of the industry.”
‘Risk-Adjusted Exposure’
The merger would create “America's first large-scale, integrated natural gas producer” and offer “risk-adjusted exposure” to natural gas prices,” Rice said. EQT also would see its long-term corporate free cash flow breakeven reduced “to less than $2/MMBtu.”
That is important at a time when Henry Hub futures are consistently trading below the $2.00/MMBtu level. The March New York Mercantile Exchange gas futures contract settled Friday at $1.805. Physical markets are under pressure, too. NGI’s Spot Gas National Avg. closed out trading last week at $1.420.
EQT began curtailing 1 Bcf/d in late February because of low gas prices. The reduction is set to extend through March, resulting in 30-40 Bcf net production cuts.
Harkening back to the conference call in February to discuss fourth quarter results, Rice told investors on Monday that, “we see a low-cost structure as the only competitive advantage one can have in a commodity-driven business, which is why it has been our North Star, guiding our strategic decision-making over the past several years.
“To put things into perspective pro forma for the transaction, our long-term free cash flow breakeven price will be approximately 75 cents/MMBtu below the peer average and roughly $1.50/MMBtu below marginal producers in the Haynesville Shale.
“Said another way, at a price that enables marginal producers to simply break even, we project EQT would generate $1.50/MMBtu free cash flow margin, which means EQT should produce nearly $3 billion of free cash flow before Haynesville assets begin generating their first dollar.
“Further, our low-cost structure will largely eliminate the need to hedge long term…This exemplifies how the acquisition of Equitrans uniquely positions EQT to both capture upside price asymmetry, while simultaneously providing a structural hedge against downside price environment like we are in today.
“In a volatile global gas market, we believe this business model will be increasingly coveted by investors.”
MVP Sale?
Included in the purchase is the Equitrans-led Mountain Valley Pipeline LLC (MVP) system. The combination is contingent on the Federal Energy Regulatory Commission authorizing MVP to begin service. Wracked by numerous construction and legal delays, MVP is set to be completed by the end of June.
As EQT is planning to sell around $3.5 billion in assets, executives were queried as to whether MVP could be included in the sales process.
“What we put out publicly is focused on some of the regulated assets at Equitrans,” CFO Jeremy Knop said. “MVP certainly could be…a logical divestment candidate,” as it is one of the highest quality pipelines in the country with brand new, 20-year contracts. So that is certainly something that is on the table.”
Rice discussed MVP’s advantages, particularly in serving growing demand in the Southeast.
“When you look historically at the southeastern market, there's been some periods of time that look very similar to energy prices that you see in Boston, MA,” Rice said. There have been “periods of time” when Charlotte, NC, customers have paid “north of $20 for their energy prices. It's not because energy prices cannot be affordable, it's because they did not have enough pipeline infrastructure.
“MVP is going to help solve that.”
The Southeast’s power generation consumption is growing in several markets, including to power artificial intelligence (AI).
“It’s going to create even more opportunities,” Rice said of AI. “MVP is an incredibly important piece of infrastructure,” and laws have been enacted “to make sure this pipeline gets done, because it is critically important for the energy security of that region and the U.S.”
Rice noted that EQT’s “data-driven operating model” and “first-hand knowledge of Equitrans' operations…gives me tremendous confidence in EQT's ability to seamlessly combine the two companies and capture synergies.”
Equitrans CEO Thomas F. Karam said the transaction was "the culmination of an exhaustive process…to determine the best strategic path forward for our shareholders, employees and stakeholders.”
The deal “creates a premier vertically integrated natural gas business that is a game changer for the natural gas industry and Appalachian Basin.”
EQT expects to see annual synergies of around $250 million with the merger. It also said it had identified a “pathway” to $175 million of additional synergies from optimizing system pressures, integrating water networks and executing expansion projects.
Under the terms of the agreement, which each board has unanimously approved, Equitrans would trade each common share for 0.3504 shares of EQT common stock. EQT's existing shareholders would own about 74% of the combined company with Equitrans owning the minority stake.
The transaction is expected to be completed by year’s end. Three representatives from Equitrans are to join EQT's board once the deal is completed. EQT's executive team would lead the combined company with headquarters remaining in Pittsburgh.
