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Eclipse Resources, Blue Ridge Unite to Form Utica Gas Major

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Eclipse Resources Corporation ECR recently inked a deal to merge with its industry peer Blue Ridge Mountain Resources. Notably, post the announcement of the deal, shares of Eclipse Resources dipped 11.3% to close at $1.49 on Aug 27, reflecting investors’ disappointment toward the deal.  

Notably, Eclipse Resources lost more than 94% of its value since the company went public in 2014. As it is, shares of Eclipse Resources have plunged 33.7% over a year against the industry’s growth of more than 25%.

 

 

Dismal performance of the company along with its high debt-to capital ratio of around 47% are major concerns for investors. As such, investors would have been pleased if Eclipse Resources was acquired by a larger firm at an attractive premium, rather than the company being a buyer at the moment.  

Deal Terms

The deal is valued at $908 million in equity, wherein Eclipse Resources will exchange 4.4259 shares of its common stock for each share of Blue Ridge. The transaction values Blue Ridge at $7.44 based on Eclipse Resources’ closing price on Aug 24. With the closure of the transaction, there will be a 15-to-1 reverse stock split of Eclipse Resources.

The deal has been unanimously approved by the board of directors of both the companies along with the shareholders of Eclipse Resources. Subject to satisfactory closing conditions, along with Blue Ridge’s shareholders’ consent and other regulatory approvals, the deal is set for closure by the fourth quarter of 2018.

Post the culmination of the deal, Eclipse Resources will own 57.5% stake in the combined entity and Blue Ridge will hold the remaining 42.5%. The merger values the combined entity at $1.4 billion, including debt.

Following the merger, Eclipse Resources’ founder and CEO Hurlburt will exit the company. President and CEO of Blue Ridge, John Reinhart, will be at the helm of the new entity.

Deal Motive

Headquartered in State College, PA, Eclipse Resources has a huge acreage in Ohio and Utica shale play in the Appalachian Basin. On the other hand, Irving, TX-based Blue Ridge is also a noted Utica shale explorer, with holdings in West Virginia and Ohio. The complementary asset base has been the key driver of the deal. The buyout will integrate the premier natural gas assets of both the companies, bolstering scale and leadership position of the combined entity in the region.

Eclipse Resources had initiated a strategic evaluation of the company early this year, with intent to maximize its shareholders’ value. Management believes that the merger ticks all the right boxes and will provide lucrative growth opportunities to the firm in the long term.

Deal Benefits

The deal will help the companies to consolidate their premier properties, resulting in higher production and cash flow. The combined entity is likely to own more than 227,000 net undeveloped core acres in the Utica and Marcellus regions. The new entity is set to have 735 net locations, representing a 94% and 106% increase for Eclipse Resources and Blue Ridge, respectively. With the merger, Eclipse Resources forecasts its output level to grow 20% at an annual rate, being within the cash flows. In fact, the company expects to generate free cash flow starting from 2020.

The transaction is likely to reduce the leverage ratio of Eclipse Resources from 2.8 to 2.1. The company plans to further improve the same, targeting a ratio of 1.5-1.7 going forward.

The transaction aims to reduce costs through economies of scale. Additionally, the strategic merger is expected to lead to significant commercial, financial and operational synergies, due to the integration of asset, systems and staff. The deal is expected to result in annual corporate general/administrative savings of around $15 million.

Zacks Rank and Other Key Picks

Eclipse Resources currently sports a Zacks Rank #1 (Strong Buy). Other top-ranked stocks in the energy space include Tc Pipelines, LP TCP, McDermott International, Inc. MDR and Petrobras PBR, each flaunting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

TC Pipelines’ 2018 earnings are expected to grow 18.67% year over year.

McDermott delivered an average positive earnings surprise of 101.65% in the trailing four quarters.

Petrobras delivered an average positive earnings surprise of 10.37% in the trailing four quarters.

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