CNX, 3 private drillers could be targets for more Marcellus roll-up

Three privately held shale gas producers and Pittsburgh independent CNX Resources Corp. could be attractive to Marcellus Shale drillers looking to bolt on more acreage, according to an S&P Global Market Intelligence analysis.

In early May, EQT Corp. continued the push toward consolidation in the Marcellus with a $2.93 billion purchase of privately held Alta Resources LLC, a northeast Pennsylvania driller that sells roughly 1 Bcfe/d of production. The Alta acquisition — which EQT President and CEO Toby Rice dubbed "low-risk, high-margin" — highlighted a trend among exploration and production companies: They expect newly purchased wells and operations to immediately contribute to income and cash flows, ideally without bringing in large amounts of debt.

A few companies have those characteristics.

Dallas-based Chief Oil & Gas LLC fits the profile of a company that would immediately add more production, almost all of it dry gas. One of Pennsylvania's largest gas producers, Chief reported production of 1.09 Bcf/d in February, and it operates in two of the state's most productive counties.

Chief's northeast Pennsylvania lease holdings are adjacent to EQT's new territory as well as that of two other potential buyers: Chesapeake Energy Corp., fresh out of bankruptcy court with a balance sheet wiped clean by Chapter 11, and Cabot Oil & Gas Corp.

Cabot has long exemplified what investors say they want: low debt, disciplined spending and free cash flow returned to investors in the form of dividends and stock buybacks. However, the company's shares have been treading water over the past year, and its top executive indicated during its first-quarter earnings call April 30 that Cabot is looking for a spark.

"Cabot, with a clean balance sheet and cash flow for 17 out of 20 quarters, was — that was yesterday. And we recognize that there's opportunity out there in the market," Cabot Chairman, President and CEO Dan Dinges said.

Chief declined to comment on whether it is for sale.

Four hundred miles to the west are two other potential targets in the wet gas window of the Marcellus Shale. With oil and NGLs in their production flows, HG Energy II Appalachia LLC and Tug Hill Operating LLC could benefit from any increase in oil as well as natural gas prices. Both are backed in part by energy private equity firm Quantum Energy Partners.

HG Energy II Appalachia's West Virginia operations are split between Marshall County in the panhandle and Harrison County, farther south. Its neighbors in Harrison County include EQT and Antero Resources Corp. The company, which also operates in a sliver of southwestern Pennsylvania, produced 482,346 Mcfe/d in 2020.

Tug Hill, another potential target with 713,228 Mcfe/d of combined 2020 production, is centered in Marshall County. Southwestern Energy Co. and EQT are both neighbors. Tug Hill was founded in 2011 and received a $450 million investment from Quantum in 2014.

Quantum did not return calls for comments about selling its stake in either company.

"Inventory is less important today, as companies are no longer in growth mode," Siebert Williams Shank & Co. LLC Managing Director Gabriele Sorbara said May 18. "In today's environment, the takeout targets are likely to have lower leverage and strong free cash flow."

In terms of potential buyers, "I would only expect EQT to continue to consolidate in Appalachia, as they seem to be focused on empire building," Sorbara said. "Cabot and [Range Resources Corp.] are less likely, as it is difficult for them to acquire better inventory" than what they have right now.

EQT management "said their view on consolidation hasn't changed, and they will continue to look at options on a deal-by-deal basis," CreditSights senior analyst Charles Johnston told clients May 6. "There were rumors in October of a merger with CNX. ... The near-term focus will be digesting the Alta assets, but incremental leverage and free cash flow per share accretive deals are still on the table."

CNX President and CEO Nick DeIuliis threw cold water on any deal talk last fall by saying that the CNX board would insist on receiving a premium in any merger or acquisition.

Still, CNX changed its tune last fall from being a buyer of assets to a seller, veteran shale gas analyst Subash Chandra with Northland Securities Inc. said May 18. Shareholders are losing patience with CNX's plan for billions in future free cash flows. "What ends up in my pocket?" Chandra asked rhetorically.