Rice Energy: The Implications Of The Vantage Energy Deal

| About: Rice Energy (RICE)

Summary

Rice Energy agreed to buy private Vantage Energy for $2.7 billion, including assumed debt.

The deal includes the intention to ramp up natural gas production on the Vantage Energy assets.

The purchase has negative implications for other industry players while the share issuance probably caps upside of Rice Energy.

Most people in the investing world probably don't know a ton about Rice Energy (NYSE:RICE). The natural gas producer IPO'd in early 2014 during a period of weakness for the commodity leaving the company relatively undiscovered.

On the backs of the huge rally to $27 this year, Rice Energy has a market valuation in excess of $4 billion. The deal to buy private Vantage Energy (Pending:VEI) places the company on par with the likes of Chesapeake Energy (NYSE:CHK) and Southwestern Energy (NYSE:SWN) while having negative implications for the those firms.

The deal involves Rice Energy paying $2.7 billion for Vantage, including assumed debt. To pay off the deal, Rice will issue a 46.0 million share secondary offering to help cover the $1.02 billion cash portion of the deal. In addition, the company will pay an additional 39.1 million shares to Vantage sellers. In total, Rice will issue nearly 85.0 million shares for the deal.

Where the deal turns highly negative for industry players like Chesapeake Energy and Southwestern Energy is the ability of Rice Energy to quickly produce huge volumes of gas in the Marcellus and Utica plays. Typically, deals involved in a struggling industry include the intent to pull capacity out of the system.

For those not familiar with Rice, the company has historically been extremely aggressive with production growth. The natural gas producer claims the ability to make an approximate 95% return at strip pricing. The new Vantage Energy acreage that includes 85,000 net core Marcellus acres and 52,000 Utica acres only further enhances the ability to grow production.

The Marcellus producer now forecasts 2017 production reaching over 1,300 MMcfe/d. The odd part and the concern for the industry is the focus on how production is up 70% for the company from the 2016 level.

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Source: Rice Energy merger presentation

The growth isn't a organic number considering a good portion of the listed growth is the additional Vantage production not included in the 2016 numbers. Using the 399 MMcfe/d level listed for Vantage during Q2, the combined production for 2016 was more around 1,130 MMcfe/d.

The scary part for the industry players is how Rice Energy is more than willing at current prices to ramp up production on the assets acquired from Vantage. The goal is to grow the production rate of the Appalachia assets nearly three-fold by 2020 to greater than 700 MMcfe/d from the current rate of 268 MMcfe/d.

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Source: Rice Energy merger presentation

The key investor takeaway is that Rice Energy is difficult to buy after the huge rally and these share offerings. No doubt, the private equity players like Quantum, Riverstone, and Lime Rock will quickly look to unload the acquired shares when possible. At the same time, these moves have huge negative implications for other industry players as the prolific gas production from the Marcellus and Utica continue nearly unabated with relatively no price concerns.

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