Top U.S. natural gas producer EQT Corp on Monday said it agreed to buy Equitrans Midstream ETRN-N in an all-stock deal that values its former pipeline unit at about $14 billion including debt, as companies look to navigate decade-low prices for the commodity.
Merger activity in U.S. shale oil and gas has soared in pursuit of greater scale and cost efficiencies amid volatile prices, with $250 billion in deals in the oil and gas industry in 2023.
The combination will allow EQT to lower costs to produce and transport its natural gas to market by adding more than 2,000 miles of pipelines, the companies said on Monday.
“The only way to truly thrive in this world is to be at the low end of the cost curve,” EQT finance chief Jeremy Knop said on a conference call with analysts.
But investors were unimpressed by the combined company’s $13.4 billion in debt and $250 million a year in potential synergies. EQT shares fell 8% to $34.53 while Equitran rose 2.7% to $11.55 in midday trading. At the current price of EQT, the offer would be valued at $12.10 per share.
“While operationally we like the combination, the deal adds an equity overhang as midstream holders may have different priorities, and the incremental debt likely directs EQT’s free cash flow to leverage reduction over all other options for the near-term, which we expect to result in the shares trading down,” said Bertrand Donnes, analyst at Truist Securities.
A global gas glut has pummelled prices, forcing producers to curb output and spending on drilling activity. EQT, which has been an aggressive consolidator, is curtailing nearly 1 billion cubic feet per day (bcfpd) of natural gas production this month.
The deal is expected to help lift margins by gaining better control of pipeline costs and processing as EQT pushes to get global prices via greater exposure to liquefied natural gas export markets.
“This vertical integration positions EQT as the lowest cost natural gas producer in the United States,” said CEO Toby Rice. “We believe this business model will be increasingly coveted by investors.”
EQT has preliminary deals with LNG developers Commonwealth LNG, Glenfarne Energy Transition and Energy Transfer that will let it sell LNG to international markets when their export plants are completed.
Each outstanding share of Equitrans common stock will be exchanged for 0.3504 shares of EQT, giving the deal an equity value of about $5.5 billion.
The deal, which is expected to close in the fourth quarter, will bring back a business that EQT spun off in 2018. EQT shareholders will own about 74% of the combined company and Equitrans shareholders will own the rest.
Equitran is the lead partner and operator of the Mountain Valley natural gas pipeline, the only big gas pipeline under construction in the U.S. Northeast. It has encountered numerous regulatory and court fights that have stopped work several times since construction began in 2018.