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Lack of gas price volatility making M&A easier in Appalachian shales

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Lack of gas price volatility making M&A easier in Appalachian shales

Stable natural gas prices have made mergers and acquisitions in the Appalachian shales easier, with public companies in a better position to make deals than private equity investors, an industry analyst said Oct. 23.

"We have a lot of tailwinds in the market right now, most importantly the fact that we have a most supportive commodity price environment," Macquarie Capital (USA) Inc. Senior Vice President Robert Hagerich said. "Once we've seen a lot of volatility come out of the market, we've seen the convergence of the strip and [analysts'] consensus pricing, that's a pretty solid landscape to foster M&A." Hagerich was speaking to executives at the S&P Global Platts Appalachian Oil & Gas conference in Pittsburgh.

"Stable pricing brings buyers to the table," Hagerich said, particularly public companies that can use their stock as currency to buy leases that are adjacent to their holdings with operating midstream infrastructure and production volumes that can be immediately booked with the purchasing company.

Private equity buyers are financing the exploratory drilling that expands the core fairways of the shale plays, Hagerich said, essentially buying an option on improved prices and hungry public companies looking to expand their acreage.

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An example of how quickly dealmaking has moved in Appalachia is the path of the gas assets of the coal company Alpha Resources, Hagerich said. Vantage Resources bought the gas leases in a bankruptcy sale in May 2016, then Rice Energy Inc. bought Vantage in September of that year and EQT Corp. announced the purchase of Rice in June 2017. While the deal size increased each time, the actual costs for the Alpha acreage declined with each transaction, Hagerich said.

Buyers are looking for leases that are exposed to the core areas of the shales, contiguous acreage, leases held by production, ownership of the gathering system and access to more than one transportation pipeline, Hagerich detailed.

Appalachia "punches above its weight" in a national M&A market dominated by the Permian Basin in West Texas, Hagerich said, because there is still acreage to be "blocked up" that is supported by overlying gathering systems and access to different transportation pipelines. The southwest Marcellus zone ? basically three counties: Washington and Greene in Pennsylvania and Wetzel in West Virginia ? has dominated the most recent M&A news, driven largely by EQT's pending merger with Rice and bolt-on purchases by Antero Resources Corp.. Going forward, Hagerich said on the sidelines of the conference, the same M&A dynamics will push consolidation in the Utica Shale.

Consolidation in the northeast portion of the Marcellus near the Pennsylvania/New York border will not begin until more pipeline capacity is built into the region, Hagerich said.

Hagerich would not comment directly on potentially larger mergers in Appalachia, such as a takeout of Marcellus pioneer Range Resources Corp., whose stock is trading cheaply.

"Range has built themselves a really fantastic footprint. They have a lot of optionality there; there's a lot of growth in their asset base now," Hagerich said. "There's kind of a dis-economy of scale, to some degree. You kind of hit a dead spot when you get to a certain valuation. I don't know what that number is: $8 billion? $10 billion?"

S&P Global Platts, like S&P Global Market Intelligence, is owned by S&P Global Inc.