The Marcellus Shale gas revolution is moving out of its first phase of growth at any cost and is transitioning to its second phase of focusing on shareholder returns.
That’s the philosophy EQT Corp. is taking following its announced $6.7 billion acquisition of Rice Energy. Once it closes, the acquisition creates the largest natural gas drilling company in the U.S. based on fourth-quarter 2016 production numbers.
The deal also triples EQT’s pipeline capacity to move gas from Appalachia to customers and ports on the Gulf Coast.
“It is my belief that we are in the second phase of the shale gas — I guess you can call it revolution. And the high-growth models of the first phase I don’t think are going to work in phase two. We really need to be focused on creating real value and getting that value directly back to shareholders,” EQT President and CEO Steve Schlotterbeck said in a conference call with investment analysts following the announcement of the merger.
“We will have to determine what the appropriate growth rate is, but that growth will likely be certainly within cash flow and most likely below our cash flow so that we can return cash to shareholders,” he said. “And we will have to study what the best method of doing that is, whether it’s share buybacks or re-establishing a meaningful dividend. But I think it’s critically important that we get there really as soon as practical.”
After the deal is completed, EQT’s shareholders will own 65% of the combined company, and Rice will nominate two directors to EQT’s board.
The transaction is expected to close in the fourth quarter. In it, EQT acquires 187,000 acres of Marcellus Shale from Rice in Greene and Washington counties in Western Pennsylvania. It also acquires 64,000 acres of Upper Devonian Shale in Pennsylvania, 105,000 acres of Utica Shale in Pennsylvania and 65,000 Utica Shale acres in Ohio. Rice has no acreage under its control in West Virginia.
EQT also acquires Rice’s midstream assets, which it will drop down to its own midstream operation after the deal closes.
“This transaction brings together two of the top Marcellus and Utica producers to form a natural gas operating position that will be unmatched in the industry,” Schlotterbeck said. “Rice has built an outstanding company with an acreage footprint that is largely contiguous to our existing acreage, which will provide substantial synergies and make this transaction significantly accretive in the first year.”
Most of the acreage EQT acquires from Rice is contiguous with acreage EQT controls in Pennsylvania. Schlotterbeck said the consolidation of acreage will allow wells to have longer laterals.
“This transaction is driven by our strategy to significantly improve returns on invested capital and capture capital and operational synergies, driven by a 50% increase in lateral length in Greene and Washington counties,” Schlotterbeck said.
“By extending laterals from 8,000 to 12,000 feet, the well returns will increase from 50% to 70% at a $3 NYMEX gas price,” he said. “We also will capture operational efficiencies through sharing of technical data and best practices, rig allocation, pad sites, water, access roads, etc.”
“We’ll be weighing all of the factors and determining exactly when we get there and how far we go,” Schlotterbeck said.
“But I think it’s important for a company our size and in this phase of the shale gas economy, I guess I’d say, to start looking at more moderate growth rates, generating profits and returning those profits to shareholders.”
Schlotterbeck said that’s where EQT is headed throughout the next several years.
“I’m a strong believer that the grow-as-fast-as-you-can-at-any-cost model, while probably necessary early in the shale revolution, doesn’t work anymore and isn’t going to work anymore,” he said. “And for a company our size, you know, that’s far too risky of a strategy. So, we’re going to be more prudent. We’re going to have a moderate growth rate. …
“I think we will have the leading natural gas cost structure in the country with a long, long runway of opportunity. And I think that will generate the ability to grow at pretty attractive rates while giving cash back to shareholders. I think it’s going to be a pretty attractive value proposition.”