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Cabot's $256M deal to sell Atlantic Sunrise stake gets lukewarm market response

Investors reacted in a tepid way to Cabot Oil & Gas Corp.'s proposed deal to sell its 20% stake in Meade Pipeline Co. LLC to a NextEra Energy Partners subsidiary, even as industry analysts were optimistic about the transaction.

Cabot shares were up just 1.17% to $17.74 as of 11:05 a.m. ET on Sept. 30.

Cabot had said earlier Sept. 30 that it agreed to divest a stake in Meade Pipeline for $256 million, or more than 13 times the expected 2019 EBITDAX. With the share buybacks and expected annual dividends, the gas producer hopes to return at least $490 million of capital to shareholders this year, above its target of 50% of annual free cash flow, Chairman, President and CEO Dan Dinges said in a news release announcing the deal.

The deal for Meade Pipeline would also involve NextEra's acquisition of the stake of another owner, AltaGas Ltd. unit WGL Midstream Inc. Meade Pipeline is owned by Cabot, WGL Midstream, and EIF Vega Midstream. Meade Pipeline owns about 39% of the Central Penn line, the greenfield pipeline segment of the Williams Cos. Inc.-led Atlantic Sunrise natural gas transportation project. The Central Penn line is jointly owned by Williams' Transcontinental Gas Pipe Line Co. LLC and Meade Pipeline.

Despite the lack of immediate excitement in the market over the Cabot deal, analysts at energy investment bank Tudor Pickering Holt & Co. were positive about it. They said in a note to clients that the $256 million valuation exceeded their estimated range of $200 million to $225 million. Tudor Pickering Holt expected free cash flow this year to be $660 million.

Gabriele Sorbara, an analyst at the Williams Capital Group, noted that the deal's value also beat the investment bank's estimate of about $200 million, or 10 times to 11 times the expected 2019 EBITDAX. The bank's organic free cash flow estimate stood at $512.8 million.

"While the asset sale was expected, we view the better than expected valuation as a slight positive," Sorbara wrote in a note to clients. "We maintain our Hold rating on valuation, as [Cabot] trades at 6.5x and 6.2x 2020 and 2021 EV/EBITDA, respectively, a premium to its peer average at 5.1x and 5.0x."

Cabot's sale is scheduled to close in the fourth quarter. BMO Capital Markets is the financial adviser to Cabot.

In other developments in the third quarter, Cabot announced that it bought back 10.5 million shares at a weighted average price of $18.21, or a total of $191.2 million, with 21 million more shares remaining under its authorization. Williams Capital Group wrote that the producer is "well-positioned to continue" its repurchasing program.