Wood Mackenzie Looks at EQT-Equitrans Deal

In a release posted on its website recently, Wood Mackenzie outlined that EQT Corporation’s acquisition of Equitrans Midstream Corporation increases the natural gas company’s “dominant footprint in the Northeast”.

Wood Mackenzie highlighted in the release that the combined business will create a vertically integrated natural gas company with an initial enterprise value of more than $35 billion and noted that the midstream footprint of EQT “will encompass extensive overlap and direct connectivity in core operating areas”. 

“The Northeast region has increasingly faced difficulties building new infrastructure projects and this transaction would give EQT ownership of midstream assets that should increase in value over time if the basin remains constrained,” Eunji Oh, a senior research analyst for Wood Mackenzie said in the release.

“The transaction would give EQT operatorship and ~49 percent ownership of one of the most publicized pipelines – Mountain Valley Pipeline (MVP), which EQT already holds ~1.5 bcfd of firm capacity,” Oh added.

“However, we see greater value in Equitrans’ assets outside of MVP that might be divested to reduce debt,” Oh continued.

Core Value

In the release, Oh outlined that, in Wood Mackenzie’s view, “the core value of this transaction is the integration of gathering and transmission assets across EQT’s Marcellus and Utica development areas”.

“The gathering and processing capacity fees can be substantial in a depressed price environment, and the acquisition could free up capital commitment for EQT and provide more operational flexibility for the upstream business in terms of production strategies,” Oh added.

“The cost reduction in today’s depressed market provides a structural hedge that is imminent and impactful with the synergy between midstream and upstream to increase cost competitiveness for delivered supply,” Oh continued.

Wood Mackenzie highlighted in the release that the initial market reaction to the deal was negative, “with EQT down nearly 10 percent intraday despite Henry Hub down by only two percent”.

Scott Norlin, a research manager at Wood Mackenzie, said in the release that “investors are likely skeptical of EQT’s ability to extract additional value via a re-integrated model".

“The acquired ETRN debt will re-stretch the balance sheet and raise EQT’s gearing from about 28 percent to around 40 percent. The company has worked hard to improve its debt since 2021 and has identified $3.5 billion in non-core assets to pay down debt,” he added.

“We model about $2 billion of post-dividend free cash flow in 2025 at our base case commodity price assumptions. With the divestitures, EQT could reach its new debt target of $7.5 billion by the end of 2025 or early 2026,” he continued.

EIR View, Deal Announcement

In a statement sent to Rigzone this week, which focused on the EQT-Equitrans deal, Andrew Dittmar, the Senior Vice President of Enverus Intelligence Research (EIR), revealed that Enverus’ view is that “this deal will significantly increase EQT’s runway of tier one drilling locations”.

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”.

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.

In a joint statement published earlier this week, EQT Corporation and Equitrans Midstream Corporation announced that they had entered into a definitive merger agreement.

“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, which outlined that the deal “creates America’s only large-scale, vertically integrated natural gas company prepared to compete on the global stage”.

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.

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