Appalachian shale driller EQT Corp. has agreed to buy West Virginia neighbor THQ Appalachia I LLC and immediately start booking revenue from the bolt-on acquisition.
EQT issued a news release late on Sept. 6 to say it entered into a $5.2 billion purchase agreement for THQ and THQ-XCL Holdings I LLC — acquiring upstream operations in the wet window of the Marcellus Shale, where wells commonly produce natural gas liquids like butane and propane along with gas — and XcL Midstream LLC's gathering and processing assets.
EQT announced the deal soon after media reports had said EQT, America's largest natural gas producer, was close to a $4 billion to $5 billion deal with THQ owners Quantum Energy Partners LLC and Tug Hill Operating LLC.
"The acquisition of Tug Hill and XcL Midstream checks all the boxes of our guiding principles around M&A, including accretion on free cash flow per share, [net asset value] per share, lowering our cost structure and reducing business risk, while maintaining an investment grade balance sheet," President and CEO Toby Rice said in the statement.
In the deal, EQT will pick up another 90,000 core acres in West Virginia, mostly adjacent to EQT acreage, the company said. The acreage has over 300 more drilling locations and 11 years' worth of life at present maintenance drilling rates, EQT said, with break-even prices above $1.35/MMBtu.
Anticipated deal
Analysts had expected the deal and were on board. "We believe THQ Appalachia owns over 100,000 acres with potentially over 800 MMcf/d of production in Marshall and Wetzel counties with four rigs/three frack spreads currently operating on the assets," Neal Dingmann, a Truist Securities Inc. energy equity research analyst, told clients while deal rumors floated through the marketplace. "The deal value would be on the higher side of recent transactions if the estimated purchase price and production are in the ballpark, though this is not surprising given today's natural gas strip prices."
The completed transaction could trigger more Appalachian exploration and production, or E&P, deals, Truist said.
"We believe there could be a host of other potential deals announced before year-end with most likely involving private operators selling assets while commodity prices remain strong," Truist said. "The deal could signify upside potential for other Appalachian players such as Antero Resources Corp., Gulfport Energy Corp., CNX Resources Corp., Chesapeake Energy Corp. and Range Resources Corp., among others."
Gabriele Sorbara, a Siebert Williams Shank & Co. LLC shale oil and gas equity analyst, said the deal should be an easy lift for EQT with commodity prices and cash flows at near all-time highs.
"We expect any bolt-on deal considered by management to improve its free cash flow profile and cash returns to shareholders, all while reducing leverage," Sorbara told clients. "Based on the rumored valuation and publicly available information, we see the potential for an accretive bolt-on of THQ, especially since we model EQT (pre-deal) with more than $7.0 billion of free cash flow over the next six quarters at our below strip price deck."
THQ owner Tug Hill did not respond to a media request.
Deep pockets
EQT should book $2.58 billion in free cash flow in 2022, according to S&P Global Market Intelligence's analyst consensus before the deal was announced, with more than $4 billion in free cash in 2023. As a group, U.S. E&Ps are suddenly heavy with cash that can be used for M&A or just returned to shareholders.
CreditSights' high yield analyst Charles Johnston estimated before the announcement that EQT will have $3.2 billion in free cash flow in 2023, "meaning any balance sheet impact would likely be temporary."
"Despite an unknown funding mix for any potential deal, we maintain our outperform recommendation as we expect EQT spreads (+230 bps) to continue to compress toward investment grade E&P peers (+170-185 bps) as management executes on its balance sheet goals with strong commodity price tailwinds," CreditSights said.
Bloomberg first reported news of the deal late on Sept. 4.
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