Range Resources, a leading US natural gas producer, on Monday announced an agreed deal to buy rival Memorial Resource Development for $4.4bn, in a move that showed a flicker of life in what has recently been a dormant market for energy mergers and acquisitions.
The deal is the largest acquisition of a US oil and gas production company since Encana’s $6.8bn all-cash purchase of Texas-based Athlon Energy in November 2014, according to Dealogic. This year’s previous biggest deal in the North American sector had been Terra Energy Partners’ $910m acquisition of the Rocky Mountain business of WPX Energy.
The flow of deals in the energy industry has been slow since the oil price crashed in 2014, with commodity market volatility making it difficult for buyers and sellers to agree on valuations.
Range is focused on the Marcellus Shale of Pennsylvania, which has been the fastest-growing gas-producing region of the US in recent years. Memorial has gas reserves in the Terryville area of north Louisiana.
Jeff Ventura, Range’s chief executive, said the agreed deal would give “added beneficial exposure to growing natural gas demand”, and would also strengthen cash flow and its balance sheet.
However, news of the deal brought an initially unfavourable response from the market, with Range shares dropping 10.3 per cent to close the day at $37.69 in New York.
Memorial’s proposed takeover by Range would bring to an end its short life as an independent listed company. It is less than two years since Memorial was floated on Nasdaq in June 2014, right at the peak of the latest oil price cycle.
Range is offering 0.375 Range shares for every Memorial share, valuing the equity at $3.3bn based on Friday’s closing prices. It is also taking on $1.1bn in debt.
The offer is worth $15.75 per Memorial share, giving a relatively small premium of 17 per cent to the price on Friday, and is 26 per cent below the $21.26 opening price for Memorial shares at its flotation in 2014.
Jay Graham, Memorial’s chief executive, said the two companies had complementary assets, and “the all-stock nature of the transaction will allow our shareholders to benefit from the combined assets”.
Memorial shareholders will end up with 31 per cent of the combined company’s equity. Range shareholders will own the remainder.
Last year Range was the 13th-largest gas producer in the US, with average output of just under 1bn cubic feet per day, according to the Natural Gas Supply Association.
Its production in the first quarter of this year was 1.38bn cubic feet equivalent of gas and oil per day, more than three times Memorial’s production of 420m.
Memorial is in a relatively healthy financial position compared with many of its peers in the oil and gas sector, with debt equal to 2.6 times its annualised earnings before interest, tax, depreciation and amortisation.
However, it also has control of an affiliated business, Memorial Production Partners, an oil and producer which has a significant debt burden.
In March Moody’s, the credit rating agency, confirmed Memorial Resource Development at B2 with a stable outlook, reflecting its “good liquidity”.
At the same time, it downgraded Memorial Production Partners to Caa2, citing its “deteriorating credit metrics, and its weakening liquidity”, and warned that the partnership could breach its lending covenants by mid-2017.
In April, Memorial Resource Development said it would sell its controlling interest in Memorial Production Partners to the partnership for $750,000, with the deal expected to close by the end of June.
