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EQT Focusing on Rice Merger, Future NatGas Gains in Appalachia

With just two weeks before shareholders vote on the $8 billion acquisition of Rice Energy Inc., EQT Corp.’s management team Thursday continued to plug the merger’s benefits and what it could mean for the future of the company.

“The primary driver of success in our industry is being a low-cost producer,” said CEO Steven Schlotterbeck. His prepared remarks were brief, perhaps in anticipation of the bevy of questions from financial analysts during the third quarter earnings call.

“The most impactful way to drive per unit costs lower is to drill longer laterals,” he said. “Establishing a dominant footprint of highly contiguous acreage that allows sustained longer lateral development is a real competitive advantage. This is what the Rice transaction creates for us.”

EQT has contended with concerned shareholders since the deal was announced in June, offering a variety of solutions to address concerns before the transaction is completed, now expected by the end of the year. If approved, it would create the nation’s largest natural gas producer, according to Natural Gas Supply Association data and NGI calculations. But some investors feel the proposed merger should be scrapped in favor of separating EQT’s midstream and upstream businesses to create more value. 

EQT, already an Appalachian juggernaut, would acquire Rice’s 252,000 net acres in Ohio and Pennsylvania. About 187,000 acres are in Washington and Greene counties, PA.

It’s become abundantly clear that Greene County -- where more than 2,300 unconventional drilling permits have been issued -- is the real prize for EQT as it seeks to consolidate its acreage. Schlotterbeck said the county is comprised of 370,000 acres, of which only 75,000 acres have been developed for natural gas production. If the Rice deal goes through, EQT would control 212,000 acres in the county, or to put it another way, EQT would control 57% of the county.

“There’s lots of remaining inventory acreage, a tremendous amount of resource in-place,” Schlotterbeck said. “We’re very, very confident in our ability to deliver on that synergy.”

The combined acreage position would on average enable 12,000-foot Marcellus Shale laterals, with EQT planning to “come out of the gate” after the transaction with wells stretching up to 12,700 feet. Schlotterbeck estimated that post-merger, the company would spend $100-200 million annually on infill acreage to block-up its position, a number not that much different from the $140 million it’s been spending to do that.

EQT hasn’t issued its plans for 2018, but it’s likely to be a busy year for the company, especially if the merger is completed. The company’s Mountain Valley Pipeline was recently approved by the Federal Energy Regulatory Commission. Other regulatory hurdles are ahead, but the project should be shovel-ready and in-service by the end of next year, said Jeremiah Ashcroft, president of midstream operations.

EQT has 1.3 Bcf/d of firm capacity on the 2 Bcf/d project, meaning it’ll likely have to spend more next year to meet its obligations, Schlotterbeck said, stressing that the company plans to rein in spending after next year. EQT recently completed a bond offering that brought in $3 billion. The proceeds, along with cash on hand and credit, are to finance the Rice transaction.

EQT produced 205.1 Bcfe in the third quarter, up from 196.1 Bcfe in the year-ago period and 198.1 Bcfe in 2Q2017. Production came in at the low-end of the company’s 205-210 Bcfe guidance for the period.

The producer was unexpectedly forced to curtail 3.5 Bcfe due to third party outages. A major thunderstorm in the Appalachian region, which can often bring torrential downpours, caused a natural gas liquids pipeline at an unspecified processing facility to slip, forcing the plant offline for a number of days, management said.

While local basis was a bit lower than EQT expected, McNally said earnings and cash flow were up on increases in commodity prices and sales volumes. The company’s average realized price during the third quarter was $2.76/Mcfe, compared to $2.20/Mcfe at the same time last year. Revenue was up to $660.3 million from $556.7 million over the same time.

EQT reported net income of $23.3 million (13 cents/share) for the third quarter, versus a net loss of $8 million (minus 5 cents) in 3Q2016.

Rice and EQT, whose boards have approved the merger, each are hosting special meetings on Nov. 9 for the shareholder vote. Rice is scheduled to release its third quarter earnings next week, but no conference call is planned.

Meanwhile, proxy advisory firms that include Institutional Shareholder Services Inc. and Glass, Lewis & Co., are scheduled to make recommendations about the merger on Friday, Schlotterbeck said. CFO Rob McNally said the credit rating agencies are expected to retain EQT’s investment grade rating following the transaction.

 

 

 

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