Will EQT's Spin-Off Of Midstream Businesses Prove Beneficial?

EQT Corporation's EQT board of directors has finally succumbed to months of pressure from investors and agreed to separate the company's upstream and midstream businesses. It will form an independent publicly traded company (NewCo), whose operations will focus on the midstream businesses of EQT. Following the news of spin-off, the stock declined 3.1%, making the stock fall 11.1% in the last 30-day time period.

Notably, since the $6.7 billion Rice Energy acquisition by EQT, activist Jana Partners and hedge funds D.E. Shaw & Co had pushed for the separation, as they thought it would bring better returns for shareholders.

Details

The deal is devised to be tax-free for the company's shareholders, who will retain their EQT shares and receive a pro-rata share of the NewCo.

Moreover, midstream assets of the company will drop down to its master limited partnership, EQT Midstream, which will then merge with the Rice Midstream Partners, the master limited partnership of Rice. The merged entity, NewCo, will focus on midstream businesses. The deal is expected to be over by the third quarter of 2018.  The Senior Vice President of EQT, Jerry Ashcroft, is expected to continue as the CEO of the newly independent company.

How will it Help EQT?

The spin-off is expected to enable the company to concentrate on its upstream assets, and exploration and production business. The deal will leave EQT with 680,000 core Marcellus acres and 65,000 Ohio Utica acres. With the shale production to ramp up in the coming quarters, this move can help the company benefit largely through efficient allocation of capital, compared with the previous company set-up that constrained the company's returns in the recent years.

Additionally, $2.3-$2.8 billion of free cash flow over the 2019-2023 time frame is expected to trickle down from the move, which forecasts 10-15% annual production growth. This is much needed for the company as its free cash flow generating ability did not work much in the last few years, staying in the negative region for most of the quarters.

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