- EQT buys Alta for 2.9 billion.
- Market reacts negatively.
- Strategic and accretive deal that will garner a more positive response over time.
EQT Acquires Alta Resources for 2.9 Billion in Cash and Equity, Adding 1Bcf/d of Natural Gas Production
On May 6, 2021, EQT Corporation (NYSE:EQT) announced its agreement to acquire Blackstone-backed Alta Resources Development for $2.925B in cash and stock, adding assets in the Northeast Marcellus shale play. The consideration consists of $1B in cash and ~105M common shares representing $1.925B issued to Alta's shareholders. The strategic rationale comes down to: size, market control and cost controls, and while the market is reacting negatively to the deal short term, it is accretive and strategic for EQT and improves the economic profile of other Marcellus producers.
The above chart shows EQT's market reaction to the acquisition, versus an oil and gas producers ETF (XOP), natural gas ETF (UNL) and a close Marcellus competitor Cabot (COG). The short term market reaction is clearly negative versus these.
The assets include 300K core net Marcellus acres (222K net operated, 98% held by production), acquired for about $10k per net acre, as well as 300 miles of owned and operated midstream gathering systems. The deal increases EQT's production profile by 1 Bcf/day of net production that is 100% dry gas.
Source: EQT Presentation
EQT expects the deal to generate $300M-$400M in annual free cash flow and $550M-$600M in annual adj. EBITDA, implying an ~18% unlevered FCF yield. Management shows this deal is projected to increase FCF by 55% ($2.0B) and increase FCF per share by 15% through 2026. Growing FCF is currently a goal of EQT's - and other public E&P companies- and this deal looks to be cash flow accretive per share. EQT's balance sheet also sees a reduction in its leverage profile (to less than 2.0x), which is expected lower through 2023.
We can compare some of EQT's transaction metrics against other similar Marcellus deals to get a better idea of the deal's value and the current O&G asset market. EQT's October 2020 acquisition of Chevron's (CVX) Appalachian assets saw EQT buy 450MMcf/d of natural gas production for $735MM, at around $10K/boepd and $5.8K per net acre. Southwestern's (SWN) August 2020 acquisition of Montage resources brought 100 Mboe/d of production for $870 MM, $8.07k/boepd or $2.6K per net acre. EQT's latest acquisition of Alta brings 1 Bcf/d of natural gas for $17.55k/boepd and $10k per net acre, or 75% more per flowing boe than their last 100% natural gas acquisition. While EQT paid more per transaction than these previous Marcellus deals, it is still quite an attractive price in today's natural gas (UNG) price environment.
Strategy and Rationale:
EQT has a few compelling reasons for this consolidation which can boil down to size, market control and cost controls. Larger size is often awarded a lower cost of capital, particularly on the debt side. This production also spreads EQT's G&A over more barrels. And as EQT grows and controls more area production, there are fewer producers in the area and a lower chance of local price blowouts (improving the likely price realization for all of EQT's production). There may not be great operating cost efficiencies due to less proximity to existing operations, but there is still a lot of overlap. Overall, this deal seems to make sense as it accomplishes shareholder's interests of growing EQT while growing free cash flow.
This deal improves prospects for more rational production and pricing behavior by producers in the Marcellus by eliminating a competitor and centralizing production further in the hands of fewer producers. In the context of a recent blow out of the Leidy hub price, more consolidation may be necessary. Even with the higher price paid by EQT for this deal, it is accretive and strategic. The market sometimes over-reacts or responds contrary to positive medium to long term fundamental changes to a business. In this case, the positives should outweigh the negatives for the shares, once the deal overhang is burnt through.
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