US gas producer EQT to acquire pipeline operator Equitrans in all-stock deal

EQT will acquire midstream operator Equitrans in a deal the Appalachian gas producer heralded as creating a first-of-its-kind, fully integrated natural gas business.

The deal, announced March 11, involves 940 miles of Federal Energy Regulatory Commission-regulated interstate transmission pipelines, another 1,220 miles of gathering lines, and rejoins EQT to the midstream enterprise it spun off back in 2018.

CEO Toby Rice, a prominent industry voice who frequently talks up the potential for US LNG exports to transform the global economy, said improving EQT's competitive position against integrated global operators was a motivating force behind the transaction.

"As we enter the global era of natural gas, we believe it is imperative for US natural gas companies to evolve their business models to compete on the global stage against larger, fully integrated rivals," Rice said on a March 11 conference call detailing the merger.

EQT shares closed the day down 7.8% to $34.60/share, while Equitrans settled up 1.5% to $11.32/share. Both stocks saw heavy trading.

Hedging advantage

Another motivation behind the deal, which would create a combined business valued at roughly $35 billion, was to cut EQT's cost structure and reduce the need to hedge natural gas volumes, the companies said.

As of Feb. 14, when the company announced its full-year guidance, EQT had hedged roughly 50% of its first quarter and Q2 production volumes. The company also identified its 2024 maintenance NYMEX free cash flow breakeven price to be $2.50-$2.60/MMBtu.

The acquisition of Equitrans, for lowering EQT's cost structure, will "largely eliminate the need to hedge long term, which results in more upside for shareholders compared with high-cost business models that are required to either programmatically hedge significant volumes or let production decline to protect free cash flow and survive in down cycle environment," Rice said.

With the pro forma enterprise, about 90% of the company's gas production will flow through its own midstream infrastructure, and EQT expects to eventually achieve a breakeven price below $2/MMBtu.

Jeremy Knop, EQT CFO, recalled some of the company's internal conversations about the nature of hedging after commodity markets rebounded sharply from the worst of the coronavirus pandemic.

In 2022, Henry Hub spot prices averaged $6.38/MMBtu, having risen by two-thirds from the 2021 average of $3.82/MMBtu, according to data from Platts, a part of S&P Global Commodity Insights.

EQT's average sales price before hedging was $6.22/MMBtu in 2022 while, after hedging, its average sales price fell to $3.00/MMBtu during the year, according to its 2022 annual report.

Due to its hedging strategy around the pandemic period, EQT lost more than $5 billion as prices rose, Knop said.

"We want to be in a position where our downside is very limited, if any, [and] this transaction absolutely positions us in that way," Knop said.

"If your downside is low-$2[/MMBtu] gas—where this business will be generating really robust free cash flow even in that environment unhedged—and then if the flip side happens and gas is $6[/MMBtu], $10[/MMBtu], wherever it goes to ... EQT will probably be the only business out there that is fully exposed to that," he added.

Acquiring MVP

The transaction also puts into EQT's hands the roughly 49% stake in Mountain Valley Pipeline Equitrans controlled. EQT holds 1.5 Bcf/d of the pipeline's 2 Bcf/d capacity.

Equitrans pushed back MVP's expected in-service date to Q2 2024 Feb. 20, and remains on track with that timeline, CEO Diana Charletta said March 11. Under the current plan, MVP firm capacity contract obligations would start June 1.

But MVP could be one of the assets put up for sale if the deal goes through. MVP is "a very logical divestment candidate," CFO Jeremy Knop said. It is "one of the highest-quality pipelines in the country with brand-new 20-year contracts. So that is certainly something that is on the table."

EQT is especially interested in synergies with Equitrans' gathering lines, executives said. "Our gathering infrastructure was largely built to serve EQT," said Thomas Karam, Equitrans executive chairman.

The transaction is expected to close in Q4 of this year and will be contingent upon MVP's receiving authorization from FERC to enter service.