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In one of the first corporate takeovers since commodity prices nosedived in 2014, Range Resources Corp. (NYSE: RRC) has agreed to acquire Memorial Resource Development Corp. (NASDAQ: MRD), giving Range a strong Gulf Coast presence.
However, analysts don’t view the deal signaling a wave of M&A activity from distressed E&Ps.
Fort Worth, Texas-based Range said May 16 it entered a definitive merger agreement to acquire all of Memorial Resource Development’s outstanding stock in an all-stock transaction valued at $4.4 billion, including the assumption of Memorial’s $1.1 billion of debt.
The transaction implies a value of $15.75 per Memorial share, a 17% premium based on closing prices as of May 13. It also shifts Range’s focus outside of the Appalachian Basin to “arguably one of the best gas plays in the U.S.,” according to Daniel P. Katzenberg, senior research analyst for E&P at Robert W. Baird & Co.
“We see numerous fundamental positives for RRC from this all-equity transaction, including immediate cash flow accretion, leverage compression and increased diversification that increases regional exposures to LNG and Mexico export potential in the Gulf,” Katzenberg said in a report.
Memorial Resource
Based in Houston, Memorial is a Northern Louisiana pure play company with a 220,000 net surface acreage position in the Terryville Field. The company’s assets include stacked pay potential with first-quarter production of 420 million cubic feet equivalent per day (MMcfe/d) of gas.
Memorial Resource Development also recently rearranged its corporate structure, cutting Memorial Production Partners LP (NASDAQ: MEMP) free.
On April 28, Memorial Resource said it will sell Memorial Production Partners GP LLC to Memorial Production Partners for $750,000. The transaction zeros out Memorial Resource’s interest in Memorial Production’s outstanding common units, incentive distribution rights or general partner interest.
Katzenberg said Range’s acquisition of Memorial Resource Development is not the distressed E&P deal people expected.
“Despite many expecting the first shoe to drop coming from the dearth of distressed E&Ps looking for a way out, MRD was not a financially over-levered company,” Katzenberg said.
Instead, Range’s acquisition of Memorial is more of a “unique strategic fit, rather than the beginning of a wave of M&A activity,” he said.
Outlook
So far in 2016, Range has quietly been dealing away noncore assets from its portfolio.
In March, Range closed the sale of nonoperating interest in the Marcellus to an undisclosed company for about $112 million. The sale included a 23% average working interest covering about 10,900 net acres in Bradford County, Pa., and 22 MMcf/d of net production.
In April, Range said it signed a purchase and sale agreement to sell about 9,200 net acres of scattered assets in Oklahoma to another undisclosed company for $77 million. That sale is expected to close in May.
Combined with its Marcellus sale, the company should have enough money to keep it from needing to take on additional debt in 2016, Range CEO Jeff Ventura said during an April 29 conference call.
Upon completion of its merger with Memorial Resource Development, Range expects pro-forma debt-to-capital ratio leverage of 3.5x, down from the about 5.2x Baird had projected for year-end, Katzenberg said.
In addition, Range’s pro forma natural gas hedge book is about 1,088 MMcf/d hedged for remaining 2016 and 474 MMcf/d hedged in 2017.
Under the agreement, Memorial Resource Development shareholders will receive 0.375 shares of Range common stock for each share of Memorial’s stock held. Following the transaction, shareholders of Memorial Resource Development are expected to own about 31% of Range’s outstanding shares.
Memorial Resource Development will have the right to nominate an independent director from the company to a seat on Range’s board.
The transaction is expected to close in second-half 2016.
Completion of the transaction is subject to the approval of the respective companies’ shareholders, certain regulatory approvals and customary closing conditions. The boards of both companies have unanimously approved the terms of the agreement and have recommended that both shareholder groups approve the transaction.
Credit Suisse Securities (USA) LLC was the exclusive financial adviser, and Sidley Austin LLP was legal adviser to Range for the transaction. Morgan Stanley & Co. LLC was financial adviser and Vinson & Elkins LLP was legal adviser to Memorial Resource Development. Barclays Capital Inc. was financial adviser and Akin Gump Strauss Hauer & Feld LLP was legal adviser to Natural Gas Partners, which backed Memorial.
Emily Moser can be reached at emoser@hartenergy.com.
RELATED:
Memorial Resources Development Untangles Corporate Structure, Cuts MEMP Free
Range Resources’ Stack Sale Lets Company Coast In Debt Neutral
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