EIR Examines EQT-Equitrans Deal

While upstream M&A has been quiet, at least one upstream company stayed busy on the merger front with EQT announcing the acquisition of Equitrans Midstream for over $11 billion, including over $5 billion to Equitrans’ equity holders.

That’s what Andrew Dittmar, the Senior Vice President of Enverus Intelligence Research (EIR) said in a statement sent to Rigzone, adding that a “significant part of the Equitrans assets were spun out by a prior EQT management team in 2018 and are being folded back in as Toby Rice [EQT President and CEO] and team pursue a vision of creating a low-cost integrated energy company”.

In the statement, Dittmar said that being able to supply low-cost gas through commodity price cycles is the key goal of upstream companies and a major driver of the valuation multiples companies receive on their equity. One way to lower the cost of supply is to buy higher quality upstream inventory, Dittmar noted in the statement, highlighting that this “has led to a renewed land rush of upstream M&A including $50 billion transacted already in 1Q24”.

“Another approach though is to lower operating costs on existing assets and, by acquiring Equitrans and reducing gathering fees, EQT says it will reduce breakeven costs by >$0.50 per million British thermal units and increase low-cost inventory able to break even at <$2.50 Henry Hub by over 200 percent,” Dittmar said.

“That aligns with an Enverus view that this deal will significantly increase EQT’s runway of tier one drilling locations,” he added.

The EIR SVP noted in the statement that the assets Equitrans brings to the table include 1,220 miles of gathering pipelines, 200 miles of water pipelines, 940 miles of transmission lines, plus the 300-mile Mountain Valley Pipeline.

“Synergies have been a key component of M&A for E&Ps, whether merging with one another, or in this case buying a midstream operator, and EQT says it has identified $250 million near-term synergies plus an upside case of another $175 million in synergies from asset optimization,” Dittmar said.

“The deal does come with a significant boost in debt load for EQT, with the ~$6 billion of debt on Equitrans’ balance sheet added to EQT’s $5.5 billion in debt giving the company a pro forma debt load of over $11 billion,” he added.

“The long-term debt target for the combined company is $7.5 billion with reductions to come from a combination of repayment from non-core asset sales and free cash flow. Asset sales are likely to be driven by both the upstream and midstream businesses,” he continued.

Dittmar also outlined in the statement that the longer-term market reaction to this combination, and its ability to capture increased value from lower operating costs, will likely be closely watched by other exploration and production companies with the opportunity to vertically integrate via M&A.

“Among the most likely potential candidates would be Antero Resources buying Antero Midstream,” Dittmar added.

The EIR SVP noted in the statement that, overall, the EQT and Equitrans deal “fits within a theme of U.S. independent operators building scale in a formerly fragmented industry, and in the case of EQT, and Chesapeake after its Southwestern merger, looking to compete with globally integrated companies for international gas market share”.

In a joint statement published earlier this week, EQT Corporation and Equitrans Midstream Corporation announced that they had entered into a definitive merger agreement, “creating a premier vertically integrated natural gas business, with an initial enterprise value over $35 billion, that is well positioned to be a globally competitive American energy leader”. 

“The combined company will have a peer-leading cost of supply, durable free cash flow in all price environments, and significant synergy potential,” the companies said in the statement.

The deal is expected to close during the fourth quarter of 2024, subject to required regulatory approvals and clearances, approval of the transaction by shareholders of both EQT and Equitrans, and other customary closing conditions, the companies highlighted.

“Equitrans is the most strategic and transformational transaction EQT has ever pursued, and we see this as a once in a lifetime opportunity to vertically integrate one of the highest quality natural gas resource bases anywhere in the world,” EQT President and CEO Toby Z. Rice said in the joint statement.

“As we enter the global era of natural gas, it is imperative for U.S. natural gas companies to evolve their business models to compete on the global stage against vertically integrated rivals. We have identified multiple, high confidence near-term synergies, with significant upside from future infrastructure optimization projects that we believe will drive material value creation for shareholders over time,” he added.

“Our modern, data-driven operating model, first-hand knowledge of Equitrans’ operations and successful track record integrating $9 billion of acquisitions, all of which included midstream assets, gives me tremendous confidence in EQT’s ability to seamlessly combine the two companies and capture synergies,” he continued.

Thomas F. Karam, the Executive Chairman of Equitrans Midstream, said in the statement, “this strategic transaction with EQT is the culmination of an exhaustive process conducted by the ETRN board to determine the best strategic path forward for our shareholders, employees, and stakeholders,”.

“Combining with EQT creates a premier vertically integrated natural gas business that is a game changer for the natural gas industry and Appalachian Basin. The transaction delivers full and fair value to ETRN shareholders and provides the opportunity to participate in future value growth as EQT executes on its strategy,” he added.

“We are proud of our employees who have worked hard to build one of the leading midstream companies in the Appalachian Basin. And we are excited for the future with EQT,” he continued.

To contact the author, email andreas.exarheas@rigzone.com