EQT In $5.2B Appalachia Bolt on Deal
EQT Corporation (NYSE: EQT) has revealed that it has entered into a purchase agreement with THQ Appalachia I, LLC (Tug Hill) and THQ-XcL Holdings I, LLC to acquire Tug Hill’s upstream assets and XcL Midstream’s gathering and processing assets for a total consideration of $5.2 billion.
The transaction is expected to close in the fourth quarter of this year, with an effective date of July 1, 2022. The total purchase price consists of $2.6 billion in cash and approximately $2.6 billion in EQT common stock, EQT outlined.
EQT, which described the deal as a “strategic bolt-on”, revealed that the transaction adds around 800 MMcfe/d in the core of southwest Appalachia. Integrated midstream facilities resulting from the deal provide superior economics and margin capture and the transaction further improves the durability of EQT’s free cash flow generation, according to the company.
“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, NAV per share, lowering our cost structure and reducing business risk, while maintaining an investment grade balance sheet,” EQT President and CEO Toby Z. Rice said in a company statement.
“The valuation metrics are compelling and accretion from the deal should lower our NYMEX free cash flow breakeven price by approximately $0.15 per MMBtu, which gives us greater free cash flow durability through the cycle,” he added.
“As a result of even more confidence in the sustainability of our business, we are enhancing our shareholder returns framework by doubling our share repurchase authorization to $2.0 billion and increasing our year-end 2023 debt reduction goal from $2.5 billion to $4.0 billion,” Rice continued.
Commenting on the deal, Wil VanLoh, the founder and CEO of Quantum Energy Partners, which backs Tug Hill and XcL Midstream with equity commitments from funds it manages, said, “We are extremely pleased to have entered into this transaction and, in doing so, look forward to becoming a core shareholder in EQT and working closely with the EQT management team and board to enhance the long-term value of the company”.
“We believe the company is in a uniquely strong position as the largest producer of natural gas in the country, with a differentiated track record of operational excellence, a deep core inventory base and a peer-leading commitment to ESG,” he added.
“The Tug Hill and XcL Midstream assets are complementary to EQT’s existing footprint, and we believe the company is now positioned to create even more value for its shareholders through this highly strategic combination,” he continued.
Michael Radler, the CEO of Tug Hill and XcL Midstream said, “I am very proud of the Tug Hill and XcL Midstream teams and the amazing job they have done in building premier upstream and midstream companies in the heart of southwest Appalachia”.
“Quantum has been a great partner and stood beside us as we built these companies over the last decade. People are what make companies great, and EQT, Tug Hill, XcL Midstream and Quantum have great people with shared values. We have long admired EQT and believe they are our natural acquiror given the synergies between the businesses,” he added.
Significant Vote of Confidence on Ability of Appalachia to Supply USA
The purchase of Quantum-backed Tug Hill and affiliated XcL Midstream by EQT for $5.2 billion is a significant vote of confidence on the ability of the Appalachian Basin to supply the U.S., and potentially even global allies, from a company deeply committed to the region.
That’s according to Enverus Director Andrew Dittmar, who noted that, unlike other Appalachian operators that have diversified their production base into the Haynesville, EQT has stayed true to its roots in the Marcellus and Utica, confident that inventory and infrastructure in the region will be sufficient to sustain the company long term.
“With that in mind, the addition of the Tug Hill assets with their high-quality inventory runway of over 10 years plus the XcL midstream infrastructure looks to be an extremely positive development for the company,” Dittmar told Rigzone.
“The expansion in the southwest part of the play nicely balances the company’s earlier entry into the northeast Marcellus when it acquired Alta Resources for $3 billion in May 2021,” he added.
Dittmar highlighted that the deal is the largest U.S. upstream transaction in about a year, since ConocoPhillips purchased Shell’s Permian assets for $9.5 billion in September 2021.
“More significantly, it is the largest Appalachian deal in over five years, or since EQT purchased Rice Energy for $8.2 billion in summer 2017. The purchase of Rice Energy is also how Toby Rice, current CEO, came to be involved with EQT,” Dittmar said.
“While high commodity prices have encouraged numerous private companies to engage in processes to sell themselves, volatility and a gap in valuations between the expectations of private sellers and public buyers have meant getting a deal in place has been challenging,” he added.
“With that in mind it is highly encouraging for the outlook for M&A to see a private sale of this scale that is well received by public E&P investors,” Dittmar continued.
The Enverus director stated that, while inventory runway is important, investors are currently highly focused on deals helping fuel dividends and buybacks.
“The deal also meets expectations around that as the purchase price implies a conservative 2.3x next-twelve-month EBITDA for just the upstream assets and 2.7x EBITDA for the upstream and midstream assets combined,” Dittmar said.
“All in, the assets have a 27 percent next-twelve-month free cash flow yield. The boost to free cash flow per share, plus a doubling of EQT’s authorized share repurchase to $2 billion are certainly key factors in why investors seem to be reacting favorably to the deal,” he added.
“For Tug Hill, XcL, and their private backer Quantum Energy the sale is a successful monetization of a major upstream and midstream investment. The consideration received is split equally between cash and stock, likely allowing Quantum to make some immediate payments to its investors while also retaining the chance to participate in further upside should EQT perform well,” Dittmar continued.
“Although the preponderance of deal value has shifted towards cash recently, private sellers that previously took stock have gained considerable additional value beyond the headline sales price from strong performance of E&P equities,” he concluded.
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