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Rice Energy to buy private firm Vantage in $2.7B Marcellus-focused deal

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Rice Energy to buy private firm Vantage in $2.7B Marcellus-focused deal

agreed to buy and Vantage EnergyII LLC for about $2.7 billion, vaulting it into the top ranks of Appalachia's shale gas drillers.

The deal includesabout 85,000 net core Marcellus Shale acres in Greene County, Pa.; rights to thedeeper Utica Shale on about 52,000 net acres; and 37,000 net acres in the BarnettShale, Rice said in a Sept. 26 news release. The assets produced 399 MMcfe/d inthe second quarter, Rice said, with almost two-thirds in Appalachia and the restin the Barnett.

Ricesaid the deal raises its 2017 natural gas production volumes 70% above the firm'sprevious guidance, to roughly 1.3 Bcfe/d. In the most recent quarter, Rice reported758 MMcfe/d worth of production, predominantly Marcellus Shale gas.

Rice also plansto drop down midstream assets acquired in the deal to Rice Midstream Partners LP for $600 million. The midstreamassets include 30 miles of dry gas gathering and compression. Rice Midstream wouldprovide gas gathering, compression and water services to the Pennsylvania acreage.

The total considerationis made up of $1.02 billion in cash; the assumption and retirement of $700 millionin net debt; and membership interests in Rice Energy Appalachia LLC that can beexchanged into 39.1 million shares of Rice common stock, valued at $980 million.

The deal isscheduled to close in the fourth quarter, pending customary closing conditions,according to the news release.

At thesame time, Rice said it will sell 40 million shares of new stock to help pay forthe acquisition, worth about $1.09 billion at Rice's $27.14 closing price Sept.26.

WolfeResearch analyst Bob Parija told his clients in a Sept. 21 note that he liked Vantage— as a purchase for Rice competitor EQTCorp. — for between $2.3 billion and $2.7 billion.

He saidVantage has a "core of the core" land position in Greene County prospectiveto the stacked plays of the Upper Devonian, Marcellus, and Utica that would allowfor a bolt-on buyer to drill longer, more cost-effective laterals beneath the umbrellaof an existing gathering and processing system.

Ricesaid the deal would give it control of approximately 231,000 net acres in the Marcellusand Ohio Utica shale plays with an inventory of 1,164 drilling locations that havea 95% margin if priced to the current NYMEX strip. While the 2017 NYMEX strip endedSept. 26 at $3.154/MMBtu, cash prices at the nearby Dominion South hub were 71.8cents per MMBtu for the day.

Rice'spocketbook may still be open for more acreage deals, CEO Daniel Rice IV hinted inthe statement announcing the deal. "Our transaction financings are meant tostrengthen Rice Energy's balance sheet even further, including positioning us tocapture an additional 20,000-40,000 acres of leasehold adjacent to our existingposition," he said.

Vantagehas 88,634 net acres Greene County, where it has been drilling since 2010, and 37,481acres in Texas' Barnett Shale, where it has operated since 2007. Most recently,it outbid Rice in a Maybankruptcy court auction of coal company AlphaNatural Resources Inc.'s holdings, paying $339.5 million for 27,400net undeveloped acres in Greene County.

Likethe other drillers in the county, such as CONSOLEnergy Inc. and EQT, Vantage has driven its costs down by owning itsgathering operations and reducing drilling times. Vantage's cash well costs average50 cents per Mcfe, including gathering but before depletion, and it has roughly80% of its production hedged at $2.10/MMBtu at Dominion South, according to a Sept.13 filing for an initial stock offering.

Accordingto its prospectus, Vantage is running two rigs in Greene County and has doubledits Appalachian production every year since 2013, the company has 47 active wellsin Greene County, according to the Pennsylvania Department of Environmental Protection.

Vantage,backed by $485 million in commitments — the bulk from private equity firms QuantumEnergy Partners LLC, Lime Rock Partners and Riverstone Holdings LLC — filed forthe initial public offering two years after it abandoned an IPO due to market conditions.