May 16, 2016 / 10:20 AM / 3 years ago

Range Resources buying Memorial in rare energy merger

(Reuters) - Range Resources Corp (RRC.N) said on Monday it will buy fellow natural gas producer Memorial Resource Development Corp MRD.O for about $3.3 billion in stock, at a time of almost no mergers and a rising tide of bankruptcies in the energy sector.

The deal combines Range’s prime natural gas resources in Appalachia with Memorial’s assets in Louisiana, which has ample pipeline connections to the U.S. Gulf Coast and its growing liquefied natural gas (LNG) export plants.

Hefty debt loads and disagreements over valuations between buyers and sellers have stymied scores of potential mergers since oil and gas prices tumbled in mid-2014, but this deal was reached thanks to Memorial’s light debt load and strong hedge book that allows it to sell gas at above spot market prices.

The deal will markedly add to Range’s cash-flows and improve its bottom line, while improving its credit profile.

“In contrast to significant dilutive asset sales or equity dilution, this merger looks like an inventive solution,” analysts at Sanford C. Bernstein said in a note to clients.

A person familiar with the matter said the deal does not mean a largely frozen M&A market has thawed and that there will soon be a flurry of transactions.

“This is a one-off,” said the person, who compared it to the last notable merger in the U.S. fracking industry - Noble Energy’s (NBL.N) purchase of Rosetta Resources one year ago.

With U.S. benchmark natural gas prices NGc1 plumbing near-record lows of $2 per million BTU, companies are under pressure to slash expenses and be creative.

Jeff Ventura, Range’s CEO, said the combined company will be able to sell gas into cold Northern U.S. markets in the winter, and supply power plants in the Southern United States and export platforms along the Gulf Coast.

“(This is) an operationally led transaction that really makes us a better, stronger company but it also helps significantly with the balance sheet,” he said.

Under the terms of the deal, Memorial Resource Development’s shareholders will receive 0.375 of a Range Resources share for each share they hold.

The all-stock deal is valued at $15.75 per share, a 17 percent premium to Memorial Resource Development’s Friday close. Including the assumption of $1.1 billion in debt, the deal is valued at $4.4 billion.

Shares of Memorial Resource Development were up 9 percent at $14.66 on Monday. Range Resources was down 6.6 percent at $39.28.

Memorial’s shareholders are expected to own about 31 percent of Range Resources after the close of the deal in the second half of the year.

Memorial will also have the right to nominate an independent director to Range Resources’ board.

Credit Suisse was financial adviser to Range Resources, while Sidley Austin was its legal adviser.

Morgan Stanley and Barclays Capital were Memorial’s financial advisers and Vinson & Elkins and Akin Gump were its legal advisers.

Reporting by Anet Josline Pinto in Bengaluru and Mike Stone in New York; Editing by Terry Wade and Nick Zieminski

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