Why Southwestern Energy’s acquiring smaller driller Montage Resources

When Southwestern Energy Co. acquires Montage Resources Corp. later this year, the combined company will likely be the third-largest natural gas producer in Appalachia — and a step closer to consolidation in the industry that has been hinted at but not yet become reality.

Springwoods Village-based Southwestern (NYSE: SWN) announced Aug. 12 that it would merge with Irving, Texas-based Montage (NYSE: MR) in an all-stock transaction valued at more than $200 million. The deal will likely close in the fourth quarter, pending approval from Montage shareholders. Montage’s biggest shareholder, Houston-based EnCap Investments, has agreed to vote its 39% stake in favor of the merger.

The deal will boost Southwestern’s position in northern West Virginia and eastern Ohio, providing more acreage in West Virginia than Southwestern has now and giving Southwestern a presence in Ohio. Southwestern is the fifth-largest shale gas producer in Pennsylvania. All of its holdings in the state are in the dry gas region of northeastern Pennsylvania.

CEO William Way said during a conference call Aug. 12 that Montage’s assets will be complementary to Southwestern’s, allowing the combined company to increase scale. It’ll add the dry gas Utica to Southwestern’s arsenal while adding to its assets in northern West Virginia, where increasing emphasis is being placed by companies like EQT Corp. (NYSE: EQT), which also sees growth opportunities in the Mountain State.

“Montage’s Utica experience in combination with SWN’s operational expertise is expected to accelerate the learning curve and economic potential of SWN’s existing West Virginia Panhandle Utica position,” Way said.

The combined company will have 786,000 acres across the three states with production of 2.8 billion cubic feet per day. About 80% of the production is natural gas.

Consolidation in the Appalachian natural gas industry has been long predicted by analysts — and by industry executives themselves — because of the mature nature of the Marcellus and Utica as well as the narrower growth opportunities. Some consolidation has occurred, most notably in 2018 with the EQT Corp.-Rice Energy Corp. merger. But even with low commodity prices and Covid-19 weighing on it, there hasn’t been a rush of deals.

“This is the kind of deal we’ve been looking for for a while,” said Andrew Dittmar, senior M&A analyst at Austin-based Enverus.

Dittmar noted that Southwestern-Montage is not a merger of equals but instead a deal that brings benefits of a larger asset base. He said that money for deals that had been there in the past isn’t there now, which has led to all-stock deals like this with no premiums.

Montage Resources sprang to life in February 2019 with the merger of Eclipse Resources and Blue Ridge Mountain Resources. Montage didn’t return a request for comment, and Southwestern didn’t take questions from analysts during its conference call Aug. 12 due to its stock offering announced earlier in the day.