Possible M&A Target companies - Oct 22

[dan_s]

From Simmons Equity Research 10-22-2020

With four recent public transactions, the long awaited E&P consolidation wave has finally
arrived on the oil patch. Gas has been quieter (partially due to less public companies)
with SWN/MR representing 2020's primary announcement. Nevertheless, as the cost of
capital and uncertainty surrounding the terminal value for conventional energy increase,
the necessity for cost reductions via consolidation is magnified. Accordingly, we believe
combinations between gas companies are a matter of when (...not if). Within Appalachia,
we see the merit of an EQT/CNX merger but see meaningful hurdles which could push a
potential transaction further into the future. Over the long (...long) term, we'd like to see
EQT/CNX/RRC's acreage positions in EQT's hands with the company emerging as a gas
titan. We also believe the Haynesville is well positioned for M&A and see CRK as the
natural consolidator of PE-backed E&Ps within the region.

• EQT + CVX Appalachia: One potential transaction on the horizon is EQT's acquisition
of CVX's Appalachian asset. Specifically, there was a media announcement that EQT
placed a $750M bid on CVX’s Appalachian position. According to Enverus, the assets
include 400K Marcellus net acres, 2019 production of 396 MMcfe/d with $160M of
EBITDA and $12M of non-op midstream EBITDA. Utilizing EQT’s PDP valuation from the
most recent 10-K ($1,770/flowing MMcfed at $2.58/HH) and 2019 production suggests
EQT would be paying around PDP PV10 for the asset should the $750M figure prove
accurate; however, we look toward a potential announcement for increased visibility
surrounding key metrics. A potential EQT/CVX-App announcement would be significant
but primarily represents a large bolt-on transaction. Nevertheless, we see the potential
for more meaningful consolidation in the Marcellus and Haynesville.

• Consolidating SW Marcellus: Within the Marcellus, SW PA (where CNX, EQT, and
RRC operate) represents the ideal target as we assume WV players are digesting
transactions (SWN) or fixing balance sheets (AR-not covered). In the full note, we
evaluate potential mergers between EQT/CNX, CNX/RRC, and EQT/RRC in zero
premium agreements based on 2022 expectations along with SE corporate synergy
assumptions (no ops). Based on our analysis, a potential zero-premium equity
transaction between: i) EQT/CNX (EQT = consolidator) would be accretive to EQT; ii)
CNX/RRC would be dilutive to CNX shareholders due to valuation and leverage; iii)
EQT/RRC (EQT = consolidator) would be dilutive to EQT due to valuation and leverage.
Notwithstanding the potential for value creation in an EQT/CNX merger, investors may
want EQT to primarily focus on its organic deleveraging strategy and may not desire
large-scale M&A until certain debt/leverage targets are met. Further, CNX's management
believes it is on track to be the lowest cost gas player, has been vocal about its views on
its equity valuation, and has previously highlighted a desire to be a consolidator in the
region. Accordingly, while we believe EQT should consolidate the SW Marcellus over
time, there are important impediments that may push this event further out into the future.

• Consolidating the Haynesville: The Haynesville is ripe for consolidation as there are
many private operators with large acreage positions. Since the potential targets are
privates, information is fairly limited; however, some worth monitoring include: Indigo,
Rockcliff, Vine, and Aethon. Headwinds to potential transactions include debt burdens
and existing midstream agreements while tailwinds include PE backers desiring an exit.
Currently, the market views CRK as the Haynesville's natural consolidator and we believe
investors would prefer for the region to be in the hands of fewer public operators.
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CRK, EQT and RRC are my Top Picks for natural gas and NGLs. Tomorrow I will be taking a hard look at Antero Resources (AR) as I believe NOW is the time to load up on the "gassers".