We believe the acquisition of Vantage Energy will be accretive for shareholders of this natural-gas producer, but its shares remain overpriced.
Dave Meats, CFA
02:33 PM | Email Article
shares have taken a tumble today, following the company's announced acquisition of Vantage Energy for $2.7 billion. In contrast, we believe the transaction is accretive for shareholders and our fair value estimate has increased, albeit slightly, to $20 per share. That still signals a discount to the market price since our long term natural gas forecast of $3/mcf is in line with the futures strip but slightly below consensus.
David Meats, CFA, is a senior equity analyst for Morningstar.
The deal includes 85,000 net Marcellus acres in Green County, Pennsylvania, adjacent to Rice's current position in the play, and 61% of this acreage is also prospective for the more speculative "deep" Pennsylvania Utica (most recent Utica activity has focused on shallower targets further west in Ohio). In addition, the acquisition will add to the firm's portfolio 37,000 net acres in the Barnett Shale. Although the latter is unlikely to be a priority anytime soon 97% of it is held by production, preserving long-term optionality should the commodity price environment warrant a return to drilling in that play.
In the Marcellus the acquisition will roughly double Rice's drilling inventory, and on a pro forma basis the firm now has 949 net locations to work through. The deal is further sweetened by the inclusion of 30 miles of gas gathering pipeline and 7,100 horsepower of compression, which will be dropped into the Rice Midstream Partners MLP for $600 million (Rice's ownership stake is roughly 32%).
The $2.7 billion total consideration is fairly substantial relative to Rice's $3.9 billion market cap, but the forthcoming issuance of 40 million common shares will raise around $1 billion and ease the burden on the company's balance sheet. Pro-forma for the deal we believe net debt to EBITDA is 2.6 times, which is on the side of the peer average but still perfectly manageable. We expect this metric to fall to around 2.0 times by the end of 2017 (beating management's target of achieving net debt to EBITDA of 2.5 times over that time frame).
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