Through November 2021, there were three M&A deals in the Marcellus and Utica shales.  Compared to the 16 deals in the same period in 2020, companies looking to get into or out of the Appalachian basins effectively did so in 2020.   The following table summarizes transaction activity in the Marcellus and Utica shales in 2021:

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As shown in the following table, M&A activity picked up in 2022 year-to-date, with twice as many transactions announced.

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What has caused the slight rebound in M&A activity in the Marcellus and Utica shales?  Companies are focusing on asset quality, strong balance sheets, prudent capital structures, and free cash flow growth.  Below we examine the two largest transactions that occurred in but were not limited to the Marcellus and Utica shales in 2022.

Sitio Royalties and Brigham Minerals, Inc. Merge to Create the Largest Public Minerals Owner

On September 6, Sitio Royalties Corp. (NYSE: STR) (“Sitio”) and Brigham Minerals, Inc. (NYSE: MNRL) (“Brigham”) announced a definitive agreement to combine in an all-stock merger, with an aggregate enterprise value of approximately $4.8 billion based on the closing share prices of Sitio and Brigham on September 2, 2022.  The combination brings together two of the largest public companies in the oil and gas mineral and royalty sector.  Upon completion of the merger, the combined entity will retain the name Sitio Royalties Corp.

Under the merger agreement’s terms, Brigham shareholders will receive a fixed exchange ratio of 1.133 shares of common stock in the combined company for each share of Brigham common stock owned.  Sitio’s shareholders will receive one share of common stock in the combined company for each share of Sitio common stock, based on ownership on the closing date.   Brigham’s and Sitio’s Class A shareholders will receive shares of Class A common stock in the combined company, and Brigham’s Class B and Sitio’s Class C shareholders will receive shares of Class C common stock in the combined company.  Upon completion of the transaction, the former Sitio shareholders will own approximately 54%, and the former Brigham shareholders will own about 46% of the combined entity on a fully diluted basis.

Robert Rosa, CEO of Brigham, commented,

“Our merger with Sitio creates the industry-leading powerhouse in the minerals space … with approximately 100 rigs running across all of our operating basins and greater than 50 activity wells to continue to drive production and cash flow growth.”

The Sitio-Brigham deal press release discusses operational cash cost synergies, a balanced capital allocation framework that aligns with shareholder interests to drive long-term returns, enhanced margins, and increased access to capital.  But, as a recent Forbes article points out, despite Kimmeridge Energy, which owns approximately 43.5% of Sitio, being a heavy promoter of ESG in the shale business, the press release has only a slight mention of ESG.  The only direct mention of ESG is in the last bullet point of the strategic rationale behind the deal.

EQT Corporation Continues to Add to Core Marcellus Asset Base

On September 8, EQT Corporation (NYSE: EQT) (“EQT”) announced that it entered into a purchase agreement with THQ Appalachia I, LLC (“Tug Hill”) and THQ-XcL Holdings I, LLC (“XcL Midstream”) whereby EQT agreed to acquire Tug Hill’s upstream assets and XcL Midstream’s gathering and processing assets for total consideration of $5.2 billion.  The purchase price consists of cash of $2.6 billion and 55 million shares of EQT common stock worth $2.6 billion.  The transaction is expected to close in the fourth quarter of 2022, with an effective date of July 1, 2022.  Transaction highlights include:

• ~90,000 core net mineral acres offsetting EQT’s existing core leasehold in West Virginia
• 95 miles of owned and operated midstream gathering systems connected to every major long-haul interstate pipeline in southwest Appalachia
• Combined upstream and midstream assets at 2.7x next-twelve-month (“NTM”) EBITDA
• Upstream-only valuation of 2.3x NTM EBITDA
• 300 untapped drilling locations in the Marcellus and Utica shales

The deal is the largest U.S. upstream deal since Conoco Phillips purchased Shell’s Permian Basin assets for $9.5 billion in September 2021.

EQT President and CEO Toby Rice commented,

“The acquisition of Tug Hill and XcL Midstream checks all the boxes of our guiding principles around M&A, including accretion on free cash flow per share, NAV per share, lowering our cost structure and reducing business risk, while maintaining an investment grade balance sheet.”

The Tug Hill/XcL Midstream transaction piggybacks EQT’s May 2021 $2.93 billion acquisition of all of the membership interests in Alta Resources Development, LLC’s (“Alta’) upstream and midstream subsidiaries.  Consistent with his comments on the Tug Hill/Xcl Midstream deal, Mr. Rice commented that the Alta deal would provide attractive free cash flow per share accretion to EQT shareholders.

As with the Sitio-Brigham deal, Forbes points out that the EQT-Tug Hill-XcL Midstream press release provides only a token reference to ESG in a quote by the CEO of Quantum Energy Partners, the private equity backers of Tug Hill and XcL Midstream.

Conclusion

M&A transaction activity in the Marcellus & Utica shales increased in 2022 relative to 2021, with large industry players motivated by free cash flow growth and creating shareholder value and less motivated by championing the ESG cause.

We have assisted many clients with various valuation needs in the upstream oil and gas industry in North America and around the world.  In addition to our corporate valuation services, Mercer Capital provides investment banking and transaction advisory services to a broad range of public and private companies and financial institutions.  We can leverage our historical valuation and investment banking experience to help you navigate a critical transaction in the oil and gas industry, providing timely, accurate, and reliable results.  Contact a Mercer Capital professional to discuss your needs in confidence.