Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

How do you sell equity to fix your balance sheet without selling equity? If you're Range Resources, you buy Memorial Resource Development for $4.4 billion.

Range and Memorial are two exploration and production companies heavily weighted to producing natural gas. As you can see, producing gas isn't exactly a license to print money:

Give It Away Now
U.S. natural gas benchmark price
Source: Bloomberg

The whole E&P sector has spent the past year or so trying to atone for the sins of its past: namely, borrowing to the hilt to keep acquiring land and drilling. Besides sweet-talking lending banks -- or just going bankrupt -- the sector has sold almost $27 billion worth of new shares since the start of 2015, according to data compiled by Bloomberg.

Mergers are another way of dealing with your problems -- what better way to ride out a storm but in the arms of another suffering soul?

Which brings us to Range and Memorial. No cash will change hands; rather, Range will issue new shares to Memorial's investors, leaving them owning about 31 percent of the combined business. The premium of 17 percent is low. The average for the sector so far this year is almost 64 percent, according to figures compiled by Bloomberg. And as you can see, the implied price of $15.75 only gets Memorial's investors back to where they were in February. It's also less than the $19 the company listed at in June 2014.

Thanks For The Memories
Source: Bloomberg

The energy world has moved on a long way since that summer of '14, though, and mostly in a downward direction. The two companies started talking in February, which just happens to be when the year's initial rally in gas prices went seriously into reverse. By taking Range's paper, Memorial gets to be part of a larger company better able to get through the slump. The same paper means Memorial's investors will still benefit when the market recovers. Range, meanwhile, makes itself more presentable to rating agencies.

We'll Marry Our Fortunes Together
Net debt as a multiple of forecast 2016 EBITDA
Source: Bloomberg, the companies
Note: Net debt as at the end of the first quarter.

In doing a deal rather than just selling shares -- or offloading assets in a lousy market -- Range and Memorial can present this as more of a strategic move than a defensive one. And there is some substance to that, as linking Range's Marcellus shale position with Memorial's assets near the Gulf coast offers some diversification benefits. Those look like something to revisit later on, though. For now, this is all about hunkering down.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net