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Rice intends to buy gas leases in coal giant Alpha's bankruptcy auction

Appalachian natural gas producer Rice Energy Inc. has been named the stalking-horse bidderfor leases to 27,400 net acres in Greene County, Pa., prospective to the Utica andMarcellus shales and near the best-producing shale gas well in the U.S.

The leases are being sold through bankruptcy court by the coalproducer Alpha Natural Resources Inc.

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Rice intends to finance the $200 million initial bid with someof the proceeds from an upsized stock offering at $16.35 per share, a small discountto its April 12 closing price of $16.66.

Rice's attempted purchase could be the start of Appalachian gasdrillers with relatively healthy balance sheets picking up cheap shale gas and liquidsleases from coal companies in bankruptcy auctions. Alpha Natural Resources, whichhad been a joint venture partner with Rice on some of the acreage, filed for protection in August 2015.

While the Richmond, Va., bankruptcy court will hold an auctionfor the leases in May, Rice said, Rice's initial offering creates a bottom lineto inhibit any lowball bidders. Further, analysts noted that the oversize stockoffering gives Rice additional cash to top a competing bid.

Rice said it is paying $6,600 per acre for the Greene Countyposition, which is adjacent to acreage it already operates, far less than the $17,000-per-acrevalue of Rice's current holdings, Topeka Capital Markets Inc. analyst Gabriele Sorbaratold his clients April 13.

The new leases would add 182 Marcellus drilling locations and50 Utica drilling locations, Rice said in its April 12 presentation, with 3,200of the acres already generating royalty cash. The 23,500 Utica acres are stackedbelow the 27,400 Marcellus acres.

Gathering and processing services would be supplied to the newacres by Rice's affiliated midstream MLP, RiceMidstream Partners LP, according to the presentation.

Rice's new locations are close to Range Resources Corp.'s huge Washington County well, whichhad an initial production rate of 59 MMcf/d, in addition to EQT Corp.'s champion 72.9-MMcf Greene County well, both ofwhich were announced in the past 18 months.

"This core acreage is directly adjacent to our existingproved developed Marcellus position in Greene County and increases our inventoryof low-risk, core dry gas Marcellus locations by 37%," Rice COO Toby Rice said."Additionally, the producing royalty interests and the emerging deep Uticaacreage provide a compelling mix of near-term cash flows and long-term significantresource potential."

Sorbara reaffirmed his "buy" rating on Rice stock,as did analysts at Tudor Pickering Holt & Co. and Stifel, before the marketopened April 13. In late-morning trading, Rice's shares were down 2.1%, at $16.31.

Of 34 analysts covering Rice, 14 have an "outperform"or "buy" rating on the stock, according to S&P Capital IQ data.

"Stock has been popular but has plenty of running room,"analysts at Tudor Pickering Holt & Co. said April 13. "Equity has beena top performer YTD (+53% vs. SW Appalachia peers +37%), which we expect will continueas our bullish 2017 gas call plays out [$3.15/Mcf]. Name remains our top pick givenrelative risk/reward."

Stifel analyst Daniel Guffey on April 13 said, "Followingthe successful upsized offering and subsequent acquisition, which further deleversRice's balance sheet while adding future inventory, we are increasing our targetprice to $19/share."

To finance the $200 million lease purchase from Alpha Naturalthrough the bankruptcy court, Rice is selling 20,000,000 shares at $16.35, whileminority owner NGP Rice Holdings LLC, a NaturalGas Partners affiliate, is offering 9,858,891 shares.