CNX Resources Corp. agreed to buy out its midstream affiliate, creating the “lowest-cost Appalachia producer,” the Pittsburgh-based E&P company said July 27.
Under a merger agreement, CNX Resources will purchase the remaining public stake, comprising about 42.1 million outstanding common units, of CNX Midstream Partners LP. Total consideration for the all-stock transaction, which is valued at roughly $357 million, is about $8.47 for each outstanding CNX Midstream unit.
The exchange ratio of 0.88 CNX shares per CNX Midstream unit represents a 15% premium to the 30-day average exchange ratio or a 28% premium to close on July 24, according to analysts with Tudor, Pickering, Holt & Co. (TPH).
“At first blush, valuation represents relatively low premium paid for a one-off transaction to bring cash cost savings in house,” TPH analysts wrote in a July 27 research note.
CNX Midstream Partners is an MLP with gathering and other midstream energy assets to service natural gas production in the Appalachian Basin in Pennsylvania and West Virginia. The company formed in 2016, originally as CONE Midstream Partners, a joint venture (JV) between CNX Resources, operating as CONSOL Energy at the time, and Noble Energy Inc.
However, CNX Resources rebranded the company as CNX Midstream Partners in 2017 following the purchase of Noble’s 50% interest in the midstream JV for $305 million in cash.
In a statement commenting on the transaction, CNX Resources CEO and President Nicholas J. DeIuliis said: “We expect the combined entity to be an even stronger company with a lower cost of capital and increased investable free cash flow.”
Despite the expected cash savings, no changes were made to CNX Resources’ current strategic plan to generated over $3 billion in cumulative free cash flow over the next seven years.
“Following the completion of the transaction, CNX is expected to be the lowest cost producer in the Appalachian Basin, with increased operational flexibility and basin leading operational metrics,” CNX Resources CFO Don W. Rush added in the company release.
CNX Resources expects to close the transaction in fourth-quarter 2020, at which time CNX Midstream common units will no longer be publicly traded. In aggregate, CNX will issue approximately 37 million shares in connection with the proposed transaction, representing approximately 17% of the total shares outstanding of the pro forma combined entity.
Following completion of the transaction, all senior notes of CNX Midstream will remain outstanding. No additional payments will be made to CNX in connection with the elimination of the incentive distribution rights transaction from January 2020.
The company said transaction terms were negotiated, reviewed and approved by the conflicts committee of the CNX Midstream board. The board of directors of CNX Resources and CNX Midstream also approved the merger agreement.
Citi is exclusive financial adviser to CNX for the transaction and Latham & Watkins LLP is acting as the company legal adviser. Intrepid Partners LLC is exclusive financial adviser and Baker Botts LLP is legal adviser to the conflicts committee of the CNX Midstream board.
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