Reuniting EQT and Equitrans: Navigating a Volatile Gas Market

[Editor’s Note: This article represents the opinion of the Reuters’ author and does not necessarily reflect the views of Pipeline & Gas Journal or its editorial staff.]

(Reuters) — Gas producer EQT’s 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, the new management is putting the pieces back together, on Monday striking a merger with that spinoff, Equitrans Midstream. 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.

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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