EQT to create biggest US natgas producer with $6.7 B Rice deal

(Reuters) — EQT Corp was set to leapfrog ExxonMobil as the largest US natural gas producer after saying on Monday it agreed to a deal to buy fellow Appalachian gas and oil firm Rice Energy for $6.7 B.

The tie-up would join two of the largest players in the Marcellus and Utica Shale formations, which stretch across much of Pennsylvania and Ohio and are ideally situated to supply gas throughout the US Northeast.

Rice Energy also provides technological expertise to EQT, which has operated in the Marcellus since 2009.

"EQT is a decade behind in fracking technology used by industry leaders in the Marcellus/Utica," said Dallas Salazar, CEO of energy consulting firm Atlas Consulting. "EQT needs a lot, and Rice offers a lot of what it needs."

Technology improvements allow companies to drill sideways over a longer distance, making adjacent land with gas deposits more attractive. On average, the acquisition will increase EQT's sideways drilling capacity by 50% in two Pennsylvania counties.

Controlling production costs is important when US natural gas prices remain low due to abundant supply. The Henry Hub US benchmark's average price of $3.02/MMBtu so far in 2017 is well below the 10-yr average of $4.42.

EQT has identified $2.5 B of cost savings from the proposed merger, as well as benefits from moving some of Rice's midstream assets into its pipeline business, EQT Midstream Partners. Analysts at Mizuho have estimated those assets to be worth $1.3 B.

BIGGEST DEAL

The proposed transaction, scheduled to close in the fourth quarter, would be the biggest ever for EQT, increasing its 2017 average sales volume by 1.3 Bcfed and core acres in the Marcellus field by 187,000 to 670,000.

It is offering Rice Energy shareholders $5.30 per share in cash and 0.37 EQT shares for each share held, equivalent to $27.04 per Rice Energy share. Reuters calculations show that represents a 37.3% premium to Friday's closing price.

Rice Energy's shares surged 24.8% to $24.57. EQT's shares slid 9%.

In a later filing, EQT said Citigroup, its financial adviser, had committed to back the deal with bridge loans worth $1.4 B. Should the deal collapse, Rice would pay a termination fee of up to $255 MM.

EQT will issue debt to cover the cash component and $5.4 B of equity, and will assume or refinance $1.5 B of net debt and preferred equity belonging to Rice Energy, according to a company presentation.

Wachtell, Lipton, Rosen & Katz were EQT's legal advisers. Barclays Capital was Rice Energy's financial adviser and Vinson & Elkins its legal adviser.

Reporting by Yashaswini Swamynathan and Arathy S Nair; Additional reporting by Scott DiSavino in New York; Writing by David French; Editing by Sai Sachin Ravikumar, Saumyadeb Chakrabarty and David Gregorio

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