- Implied value of $15.75 a share is 17% premium to May 13 close
- Transaction gives Range access to assets in northern Louisiana
Range Resources Corp. agreed to buy Memorial Resource Development Corp. in a $3.3 billion all-stock deal to take advantage of growing demand from natural gas exporters and chemical manufacturers. It’s Range’s largest deal on record.
Memorial Resource shareholders will get 0.375 shares of Range for each share held, implying a value of $15.75 a share, or a 17 percent premium to the closing price on May 13, the companies said in a statement Monday. The transaction is valued at $4.4 billion when $1.1 billion of debt is included.
The combination -- one of the few U.S. energy mergers during the market rout -- will give Fort Worth, Texas-based Range access to an emerging gas export market and to properties in northern Louisiana, adding to its operations in Oklahoma, Pennsylvania and Texas. While producers saw shares collapse last year with the commodities slump that slashed prices for oil and gas, Range has rebounded more than 50 percent year to date and was up as much as 79 percent at its recent peak in April.
But some investors showed concern about Range’s move to branch out from Appalachia, which was the biggest driver of gas supply growth in the past decade thanks to drilling technologies that drove down costs. Range fell 10 percent to $37.69 in New York, making it the worst-performing energy stock in the Standard & Poor’s 500 index Monday. Memorial closed up more than 3 percent to $13.86 after surging as much as 14 percent during the session.
“What we’ve been advocating for Appalachian producers is that they diversify their footprint and use their stock as currency; it’s exactly what Range just did,” said Subash Chandra, a research analyst at Guggenheim Securities LLC. “I think it’s very smart on Range’s part. It’s just another example of how they are miles ahead of the competition.”
For a quick wrap of analyst commentary on the deal, click here.
Range reported a smaller-than-forecast first-quarter loss last month. It supplied the first U.S. exports of waterborne ethane earlier this year.
The “sizeable position” in northern Louisiana will better allow Range to take advantage of rising gas exports to Mexico by pipeline and liquefied natural gas shipments by tanker, the company said in an investor presentation. Range will also be able to supply growing demand from Gulf Coast power producers and petrochemical plants.
With its Texas roots, Range became one of the biggest gas producers in Appalachia’s Marcellus shale. Marcellus drillers have been so good at cutting costs and squeezing gains from wells that supplies became stranded because of a lack of pipeline capacity in the region.
Even with Appalachian gas trading at a sharp discount to the rest of the U.S. at times, Marcellus production offers “by far the best returns and the lowest cost in all of the lower 48” states, said Vincent Piazza, an analyst with Bloomberg Intelligence. With the Memorial deal, “some of the investor base is likely disappointed because they have accorded a premium valuation to Range as an Appalachian-specific player,” he said. “It’s a question of strategic focus.”
The Memorial acquisition is the third announced by Range this year, making it the company’s most active deal-making year since 2007 when the shale boom was just getting started, according to data compiled by Bloomberg.
“This transaction will be immediately cash flow-accretive and credit-enhancing for Range,” Jeff Ventura, Range’s chief executive officer, said in a conference call with analysts Monday. Memorial’s footprint in Louisiana will give Range access to the country’s gas export market, he said.
Range plans to keep almost all of Memorial’s employees.
Memorial’s wells in the Upper Red zone in Northern Louisiana are so prolific they are on par with output from Appalachia, said Kyle Rhodes, an analyst with RBC Capital Markets. The buyout of Memorial “was a little bit of a surprise” because the company didn’t need cash and results from expansionary fields aren’t expected until later this year, he said.
The boards of both companies have unanimously approved the terms. Both expect completion, which is subject to shareholder and regulatory approvals, in the second half of 2016. Credit Suisse Group AG advised Range, while Morgan Stanley and Barclays Plc worked with Memorial Resource.