A $35 bln gas reunion tracks a topsy-turvy market

Equitrans Midstream

12/03/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own. Updates with links.)
    By Robert Cyran
       NEW YORK, March 11 (Reuters Breakingviews) - Gas
producer EQT’s  EQT.N  old management weathered an activist
investor outcry, squeaked through an expensive deal, and spun
off its pipeline division - only to be ejected by the executives
they bought out. Now, new management is putting the pieces back
together, on Monday striking a merger with that spinoff,
Equitrans Midstream  ETRN.N . It’s a sign of how a shifting
energy market has upended assumptions behind Wall Street-driven
deals.  
    Back in 2018, EQT agreed to separate Equitrans under
pressure from shareholders Jana Partners and D.E. Shaw. The two
were annoyed that EQT had overpaid in its $6.7 billion deal for
Rice Energy. They also thought spinning off the company’s
pipelines would attract different investors, creating
value. After all, midstream businesses that treat and transport
gas return most of their cash to investors. Gas
producers, historically, plowed their cash into
expanding production.
    Much has changed. A proxy fight installed Rice Energy’s Toby
Rice as EQT’s CEO. Gas prices have seesawed wildly, plummeting
during the pandemic, then skyrocketing in the recovery, only to
sink again in the United States. With volatility high and rising
renewable generation threatening to limit demand growth,
investors have pushed firms to trim risky expansion and return
capital. As EQT’s dividend increases, the rationale of splitting
a cash-consuming and cash-returning business weakens. 
    Equitrans, meanwhile, hasn’t been the promised stand-alone
success story. Anyone holding its shares saw a total loss of 7%
over the past five years; its dividend yield, currently around
5%, has not attracted a horde of investors, who now have plenty
of decent-return options from safe assets amid high rates.
    Besides, Equitrans’ assets were built to service EQT’s gas
production. By recombining, the companies reckon they can shave
$250 million of costs, worth about $2 billion taxed and
capitalized. That ably covers the $1 billion premium paid.
    Yet EQT shares fell 8% on the news. Even if the theory
behind the spinoff didn’t pan out, investors might still worry
about shelling out for a deal when gas prices are near
multi-decade lows.
    But the all-stock transaction is paid for with shares that
are richly priced, making them appealing currency: EQT trades at
6 times expected EBITDA, according to LSEG, while peers hover
around 4 times. Moreover, pipelines produce steady cash flow,
providing ballast when times are tough. The market’s wisdom
urged EQT’s breakup; with the market changing, that wisdom is
due an update.
    Follow @rob_cyran on X
         
    CONTEXT NEWS 
    EQT said on March 11 it would buy back Equitrans Midstream
in an all-stock deal that creates a vertically integrated
natural gas provider worth more than $35 billion. Each share in
Equitrans will be exchanged for 0.3504 shares of EQT stock,
worth $13.15 based on closing prices on March 8, the last day
before the deal was announced. That represents a premium of 18%
based on the closing price of Equitrans stock on the same day.
EQT shareholders would own 74% of the combined company.
    In 2017, EQT agreed to buy Rice Energy. In 2018, the
combined company split off Equitrans Midstream, its pipelines
business, under pressure from activist investors Jana Partners
and D.E. Shaw. In 2019, Derek and Toby Rice, who sold Rice
Energy to EQT, won a proxy fight at the new owner. Toby Rice is
now EQT’s CEO.

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Graphic: Natural gas prices are low and more volatile Natural
gas prices are low and more volatile    https://reut.rs/4a7Mwtz
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 (Editing by Jonathan Guilford and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com; Reuters Messaging:
robert.cyran.thomsonreuters.com@reuters.net))