EQT Corp., the country's top natural gas producer by volume, is separating its natural gas upstream and midstream businesses through the creation of a new standalone company for its pipeline operations.
The process would involve a drop-down of EQT's midstream assets to EQT Midstream Partners LP, a merger between EQT Midstream and Rice Midstream Partners LP and a sale of Rice Midstream's incentive distribution rights to EQT GP Holdings LP, according to a Feb. 21 news release. The decision comes after months of pressure from activist investors whose frustration with EQT's structure and poor stock performance only grew after the producer bought fellow Appalachian producer Rice Energy Inc. and its associated midstream unit for $6.7 billion.
The deals would not be a condition to the completion of the separation and the new business will be a publicly traded corporation. EQT Midstream and EQT GP Holdings would also remain separate entities following the separation.
EQT shareholders would retain their shares and receive a pro-rata share of the new midstream company. EQT expects the separation to align capital structures with the very separate cash flow risk/reward profiles that an upstream and midstream business create. It also expects improved efficiency in capital allocation, among other benefits.
"When we announced the Rice Energy acquisition, we committed to addressing the sum-of-the-parts discount in our shares. The Rice transaction accelerated the maturation of both our businesses, provided scale that significantly enhanced the standalone prospects of both companies, and positioned us to further enhance value through separation," EQT CEO Steve Schlotterbeck said. "We will complete the separation with urgency, consistent with our commitment to shareholders."
The new midstream company would control the third largest natural gas gathering operations in the U.S., with a primary asset footprint in the Appalachian Basin, EQT said in the release. Jerry Ashcroft, who currently serves as the senior vice president and president of midstream at EQT and senior vice president and COO at EQT Midstream, would become the CEO of the midstream company. Schlotterbeck would continue as CEO of EQT.
The separation is scheduled to be completed by the end of the third quarter, and requires a favorable opinion of legal counsel and/or a private letter ruling from the IRS regarding the tax treatment of the spin-off, as well as approval for a spin-off dividend from EQT's board. EQT intends to qualify the separation as tax-free to its shareholders. Guggenheim Securities LLC, Tudor Pickering Holt & Co., and Wachtell Lipton Rosen & Katz served as advisers to the board.
EQT has repeatedly accelerated its timeline for addressing its strategic options. Investors balked at EQT's first plans to outline restructuring plans by the end of 2018, and the board created a committee to supercharge the process and get it done by the end of the first quarter. EQT shares surged last week after the company on Feb. 15 said it would have its plans released by the end of the month, rather than the end of March.
EQT's poor stock performance prompted investors including D.E. Shaw & Co. LP and JANA Partners LLC to pressure the board to split its businesses. D.E. Shaw also recommended the simplification of EQT Midstream's structure through a merger with Rice Midstream. EQT's stock fell from above $79 per share in July 2016 to below $46 in early February 2018.
EQT's stock was up about 6% in pre-market trading on Feb. 21, while EQT Midstream's was up less than 0.5%. The three publicly traded EQT companies have a combined market capitalization of $25.5 billion.