EQT Aims For Better Access to Markets with $5.2 Billion Deal

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EQT is expanding its Appalachian footprint through the acquisition of acreage and gathering infrastructure in West Virginia, a move it expects will significantly lower costs and improve its access to markets — a challenge about which CEO Toby Rice has been particularly vocal.

“The industry is stuck between a rock and a hard place in that you have a tremendous amount of gas in the ground and the ability to move it to market is constrained,” CFRA analyst Stewart Glickman said. “[This deal] seems like a pretty smart way to go because you’re not dependent on regulators approving some project that may never get off the ground.”

The deal to acquire privately held THQ Appalachia I — a producer backed by Fort Worth-based Tug Hill Operating and Houston-based Quantum Energy Partners — as well as Tug Hill’s XcL Midstream gathering system is valued at about $5.2 billion, consisting of $2.6 billion in cash and 55 million shares of EQT common stock.

Rice said the leverage-neutral deal enables EQT to double its share repurchase authorization to $2 billion and increase its year-end 2023 debt reduction target by $1.5 billion to $4 billion.

The deal is expected to close in the fourth quarter with an effective date of Jul. 1. Subject to the transaction close and EQT’s board approval process, Quantum Energy Partners founder and CEO Wil VanLoh will join EQT’s board of directors.

EQT's Infrastructure Problem

Over the years, environmentalists opposing natural gas development have shifted their strategy from targeting those leasing mineral rights to opposing midstream projects, Glickman said. The strategy has stymied projects for years, leading to significant delays, as is the case with Mountain Valley Pipeline (MVP). It has also let to cancellations, as was the case with the Atlantic Coast Pipeline, leaving Appalachian production priced at a significant discount to benchmark Henry Hub.

“We now have access to more pipelines … to get into these [firm transportation] contracts that we’ve established," Rice told investors. "That will certainly be helpful in allowing us to access end markets, including LNG markets.”

The deal adds roughly 800 million cubic feet of natural gas equivalent per day of production to EQT’s portfolio, pushing the company's total output to 5.96 Bcf-6.50 Bcf/d, based on its guidance for the third quarter.

That gas — EQT plans to restrain TQH’s production to roughly 800 MMcf/d - 900 MMcf/d “for the foreseeable future” — will flow through XcL’s 95-mile gathering system, which sits at the nexus of every major long-haul interstate pipeline in southwest Appalachia. That includes six in-service connections to interstate pipelines including the Rover Pipeline, Texas Eastern Transmission, Equitrans, Eastern Gas Transmission and Columbia Gas Transmission.

XcL’s Midstream assets comprise 4.5 Bcf/d of gathering lines, 225 MMcf/d of processing capacity, 20,000 barrels per day of condensate stabilization, and 600 MMcf/d of compression. Its dry gas gathering system can deliver 3.5 Bcfe/d and its rich gas trunkline can deliver 1.0 Bcfe/d.

EQT has also expanded its transportation capacity to the Gulf Coast through the Midwest to between 250 MMcf/d and 300 MMcf/d. “The connectivity with XcL Midstream will help us with that interconnect even more and allow us to take our Pennsylvania gas into that pipe then down to the Gulf,” EQT CFO David Khani said.

“We paired this acquisition with the recent addition of approximately 300 MMcf/d to to our firm transportation portfolio, comprising 200 MMcf/d to the Gulf Coast and 100 MMcf/d to the Midwest,” Rice said. “We are also receiving 250 MMcf/d of firm transportation from Tug Hill, which accesses [Columbia Gas]. Along with increasing confidence around the start-up of MVP, local basis risk has been significantly reduced on the acquired assets and on legacy in-basin EQT production.”

Together with the incremental pipeline capacity, the deal means roughly 33%-37% of EQT’s pro-forma production is exposed to Appalachian pricing, down from 37%-40% previously. If MVP starts up in the fourth quarter of 2023 as EQT expects, less than a quarter of its production would be exposed to the Appalachian market.

Lower Cost Structure

“It’s pretty remarkable to think about an asset that has a breakeven at around $1.35 per million Btu,” Rice said. “For us to be able to show that we have an asset that … lower[s] our breakeven cost … by over 15¢ [per MMBtu] shows you how potent these assets are.”

Tug Hill and XcL have “really attractive gathering rates and it’s an integrated business,” Rice said. “The liquids uplift you get [from Tug Hill’s assets] reduces your breakeven costs, and that’s pretty significant.”

Rice said due diligence suggests EQT can achieve $80 million per year in synergies from the deal.

“We plan to use XcL’s platform to deliver greater pipeline connectivity across EQT’s existing acreage footprint and intend to fully integrate Tug Hill and XcL’s water assets into our existing West Virginia water infrastructure,” Rice said. “This should drive down completion and [lease operating expense] costs while also providing obvious environmental benefits by removing trucks on the road and increasing water recycling.”

The deal also will help EQT to meet its 2025 methane intensity goal of 0.02%, Rice said. At 0.004% Tug Hill's methane intensity ranks lowest among the top 100 US producers, and nearly 100% of its production is certified as responsibly sourced gas.

"Tug Hill's solid performance is largely driven by the elimination of pneumatic devices and using electric grid power for more than 70% of its pad sites," Rice said.

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