While EQT Corp. CEO Toby Rice is mum on rumors that his leading natural gas producing company is in talks with neighboring producer CNX Resources Corp. to consolidate their Appalachian companies, he’s quite vocal about the desire to pursue a corporate merger. Or multiple ones, for that matter.

“Now that we’ve got the business to a good spot, we’re focused on accelerated return of capital to our shareholders, and we think consolidation could be a vehicle that helps us accelerate that return of capital.

“It’s simple,” he said. “Consolidation could present synergy opportunities.”

 

 

Rice himself was installed as CEO just under a year and a half ago after leading a band of disgruntled shareholders, including himself, that felt disenfranchised following EQT’s acquisition of Rice’s previous company, Rice Energy, in 2017. EQT shares had fallen precipitously since that merger due to operational inefficiencies and cost overruns, he claimed.

Now, EQT is coming off of third-quarter reporting in which it revealed it has reduced Pennsylvania Marcellus well costs to $660 per foot, a 22% improvement year-over-year when costs were $970 per foot. Horizontal drilling speed has almost doubled, increasing by 95%, measured at feet per hour. Horizontal drilling days per 1,000 feet have decreased by 40%.

These and other operational and financial improvements since the new management was installed sets up EQT to be alpha acquirer, Rice said.

“We think that the company that should be developing these wells is the one with the lowest well costs, the lowest G&A, and the best marketing capabilities. That’s the natural owners of these assets, those that have a proven track record and can operate efficiently at scale. Everything we do every day is aligned with making us the natural choice, and we want to position ourselves to be the best option for that.”

Rice offers up the recent $735 million pending acquisition from Chevron Corp., announced late October, as a model of what M&A will look like for the company going forward. Although a large asset deal, the addition will be accretive on free cash flow per share, NAV per share and is deleveraging on a debt-to-EBITDA basis. Those three financial metrics must be met before EQT will transact on any deal, he said.

The Chevron assets are essentially a cash cow. Purchase metrics equate to PV17 for PDP only. And with production of 450 MMcf/d and 100 DUCs in waiting, no new drilling will be needed for four to five years to keep production at maintenance level. Little value was ascribed to the upside of 580,000 net Marcellus and Utica acres.

“This acquisition improves the capital efficiency of our entire program. We’re going to increase production by 10% with the deal, but the capex to maintain production only increases 7%. We think this is north of a 20% rate-of-return deal.”

The Chevron purchase marks the transformation of EQT, he said, to a modern digital operator with vision and purpose. Upon taking over, Rice and his team rewired the organization to be able to connect all the company’s data and communications via a centralized online platform. That has driven efficiencies and cost savings across the value chain. That digitization will allow EQT to integrate the Chevron portfolio in under two weeks.

“We feel like bigger organizations, if they do it the right way with a digitally connected organization, can actually get better as they get bigger. So we think innovation is another way we can leverage from scale.”

And while analysts like to parse the metrics of publics marrying publics in Appalachia, Rice sees a host of private operators on the consolidation table as well.

“Every company should be on the table. When you look at us collectively, we’ve got 50 teams and 33 rigs running up here in Appalachia. A lot of teams aren’t taking full advantage of their talent. That’s the value creation for us, consolidating into a larger organization that can be as efficient as the company we started with.”

And about that CNX rumor?

“Appalachia is a small place. We all know each other, we all have conversations. So I think people recognize that scale is going to be the next viable opportunity for us to create value for shareholders.”

[Editor’s Note: Look for an in-depth interview with Toby Rice in the January issue of Oil and Gas Investor.]

Comments