Investors shrug as EQT touts 'low-risk, high-margin' $2.93B Alta Resources deal

EQT Corp. investors panned the Appalachian shale gas giant's $2.93 billion planned acquisition of Alta Resources Development LLC's upstream and midstream subsidiaries even as one credit rating agency upgraded the company closer to investment grade.

The producer's stock price was down just over 8% during late-morning trading after it announced the deal that includes 300,000 core net Marcellus Shale acres, 1.0 Bcfe/d of current net production, 300 miles of midstream gathering systems, and a 100-mile freshwater system with 255 million gallons of storage capacity.

But EQT President and CEO Toby Rice said the driller could not pass up the "low-risk, high-margin" opportunity.

"The Alta assets combined core rock, low royalty burden, beneficial mineral ownership and an integrated gathering system to provide superior returns and free cash flow generation," he said during EQT's May 6 first-quarter earnings conference call. "We're willing to pay a price."

Rice noted that EQT expects that the pro forma entity will generate about $1 billion in free cash flow in 2022 after the transaction closes during the third quarter, in addition to lowering EQT's free cash flow breakeven price by about $0.10.

Fitch Ratings rewarded the driller by raising its long-term issuer default and senior unsecured debt ratings one notch from BB to BB+.

"Fitch views the transaction as credit accretive given the large equity component of the financing, the attractive northeast Pennsylvania acreage, the overall reduction in costs per unit, and incremental [free cash flow]," the rating agency said in a May 6 note to clients.

The deal is composed of $1.0 billion in cash and about $1.93 billion in EQT common stock issued directly to Alta's shareholders, and it comes just months after EQT agreed to buy Chevron Corp.'s Appalachian upstream and midstream assets for $735 million. EQT plans to hold on to the midstream assets involved in the Alta transaction because they are strategically important for margins, according to Rice.

Still, equity analysts at Scotiabank anticipated "near-term weakness as investors digest and gain comfort around a large, step-out transaction." Piper Sandler said Alta Resources "does not fit hand in glove" with EQT's existing footprint even though the deal moves "the financial pieces in the right direction."

Rice also noted that the deal, which encompasses 100% dry gas, enhances EQT's environmental performance by lowering its emissions intensity score.

In April, EQT announced it is aiming to have a majority of its produced natural gas be independently certified under standards developed by Equitable Origin Inc. and MiQ after launching a pilot project with Project Canary Inc. to produce "responsibly sourced natural gas" earlier in 2021.

Since making those announcements, the driller has "received multiple inquiries from customers and end users," Rice said.

EQT on May 5 reported adjusted net income of $83 million, or 30 cents per share, for the first quarter, compared to adjusted net income of $38 million, or 15 cents per share, a year earlier. The S&P Capital IQ consensus normalized earnings estimate for the first quarter was 27 cents per share.

First-quarter net income was a loss of $41 million, an improvement on the net loss of $167 million in the prior-year quarter. EQT posted first-quarter operating revenues of $949.9 million, a decline from $1.11 billion in the year-ago period.