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EQT, Range Swap Assets With Eye On The Future

Range Resources Corp. and EQT Corp., two of the Appalachian Basin's leading operators, announced a rare asset exchange late Wednesday that finds EQT Corp. entering the Permian Basin and Range blocking up its acreage in the Nora Field of western Virginia.

Given both companies’ sharp focus and stellar results in the Marcellus Shale (see Shale Daily, April 29; April 25), the move seemed to have financial analysts scratching their heads until many reached a favorable conclusion about what they deemed to be the reasonable strategy underlying the deal.

"For EQT, [the] Permian provides optionality if [the] company [is] able to exploit this acreage horizontally on the eastern edge of the play," wrote analysts at Wells Fargo Securities in a lengthy note to clients on Thursday. "For Range, [the] company had royalty at Nora and now with full operational control, [it] should streamline operations."

Range will transfer assets to EQT in the Conger Field of West Texas, which includes multiple targets such as the upper and lower Wolfcamp and the Cline shales. The Conger properties are home to 900 mostly vertical wells that are currently producing 28 MMcfe/d, with 62% consisting of liquids. In exchange, EQT will pay $145 million in cash, along with 138,000 net acres and a 50% interest in 1,200 miles of gathering pipelines and compression in the Nora Field, where EQT's properties are currently producing 41 MMcf/d from mostly coalbed methane.

The Permian properties had an estimated sale price of $500-700 million, according to many analysts who chimed in about the sale on Thursday. That would mean, given the $145 million payment to Range, that the Nora assets were valued at about $450 million or so, leading some analysts to wonder if Range had somehow been short-changed in the deal.

Yet the transaction’s swap nature made it tax efficient and increased Range's acreage position in Virginia from 247,000 net acres to 385,000 net acres, bumped production from 70 MMcf/d to 111 MMcf/d and increased its pipeline assets by 1,200 miles. Analysts at Wells Fargo also said Range is familiar with many of the stacked plays in the Nora Field, which they said will lower the acquisition risk and make competition for Marcellus capital virtually nonexistent.

"The Street reaction is likely to be, 'why Nora?' Given that Range hasn't been very active in the region," Wells Fargo analysts said. "However, we think the transaction does make sense as Range grabs what has the potential to become a meaningful strategic asset. The company now has full operational control, which should allow for more exploration and concepts to be tested in an area which we believe has significant stacked pay, likely provides a plethora of workover and re-complete opportunities, and increases its midstream presence in a region of the country which should continue to have growing demand."

Indeed, both sides of the transaction seemed to have an eye toward the future. An expansion in the south of the Appalachian Basin gets Range closer to the growing infrastructure planned for the region and a greater ability to serve the 3 Bcf/d of additional demand forecasted for the southeast in the coming years. While EQT appears to be aiming for returns in the Permian Basin that can compete with what it has done in the Marcellus in recent years, analysts said.

Range noted that the Nora properties are located along the East Tennessee pipeline, which interconnects with the Atlantic Coast Transcontinental pipeline segment through the Patriot pipeline system to Transco Zone 5. A number of natural gas-fired power plants are expected to demand an additional 1 Bcf/d in Virginia in the near future, as well.

"What we also like are the marketing agreements in place today and those expected to materialize over the next few years," wrote BMO Capital Markets analyst Dan McSpirit about Range's part in the deal. "This is the larger point of distinction to the story, in our view, talking about getting product out of the basin."

Like Range, which produced nearly 80% of its full-year volumes in 2013 from the Marcellus (see Shale Daily, Feb. 26), EQT generated 73% of its production from the Marcellus last year (see Shale Daily, Feb. 13). In discussions with analysts at Wells Fargo, EQT management said the Marcellus will remain a top priority and did not say that the Permian Basin will be a new core area for the company.

"We think of [EQT's] entrance into the Wolfcamp as similar to the Ohio Utica in that if it can crack the code in an area outside the core of a major resource play, it could build a sizeable footprint at a low cost, and if not, capital will be reallocated," said BMO Capital Markets analyst Phillip Jungwirth. 

The asset exchange is expected to close sometime this quarter. EQT said once that happens, it plans to drill two horizontal wells on the newly acquired acreage in West Texas, with plans calling for the possibility of between 20 and 30 horizontal wells there next year.

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