An activist investor is urging EQT Corp. (NYSE: EQT) to take a bold step and commence merger discussions with Antero Resources (NYSE: AR) or Range Resources Corp. (NYSE: RRC) for “much needed, large-scale consolidation in the Appalachian Basin.”

The bold suggestion, should it ever come to fruition, could potentially reshape control of gas production in the eastern U.S. It would create a company with an estimated enterprise value exceeding $25 billion.

On Dec. 28, Chapter IV Investors LLC sent a letter to EQT’s board of directors asking it to engage an investment banker and reach out to the two companies to submit competitive bids for a stock-for-stock merger. Chapter IV owns and has economic interests in the securities of all three companies.

The firm’s vision is that it might one day be possible to house the assets of EQT, Range and Antero under one roof, but only after the first step of merging EQT with one of the other companies.

W. Barnes Hauptfuhrer, portfolio manager of Chapter IV, is spearheading the concept. Hauptfuhrer is a 30-year industry veteran whose private equity group was selected as a founding institutional shareholder of Kinder Morgan in 1997.

Scott Hanold, an analyst at RBC Capital Markets LLC, said Chapter IV believes Appalachian consolidation is necessary and that EQT is in the best position to lead it.

“We expect this letter to spur some conversations on the merits of consolidation in the region,” Hanold said. “The Marcellus and the liquids-rich Utica are at a maturation point where consolidation can make sense but we think dry-gas Utica value can still be debated thus making certain combinations a bit more challenging.”

In a letter disclosed Jan. 3, Hauptfuhrer said a combination of EQT and either Antero or Range would unlock a multibillion-dollar value creation opportunity for EQT shareholders and the shareholders of EQT’s chosen merger partner.

“Antero and Range are each excellent companies,” Hauptfuhrer said. “Like EQT, neither of those companies needs to acquire, sell or merge with another entity.”

However, the companies’ geographic footprints and their extensive low-cost, high-return resource bases uniquely position each of them to be an attractive potential merger partner for EQT, he said.

EQT combined with Range or Antero would:

  • Be the largest natural gas producer in the U.S. (more than 4 Bcf/d);
  • Becomes a strong acquirer of E&P & midstream assets;
  • Be a leader among midstream business in Appalachia;
  • Drive low finding and development costs;
  • Tap a deep well inventory with potential 20% production growth for years; and
  • Hold a dominant proved reserves and undeveloped resources position.

A combination between EQT and Range or Antero would immediately create “the largest and best-positioned natural gas producer in the U.S. … and also control a complementary, high-growth midstream business that would provide cash flow stability and funding to accelerate its high-return E&P business.”

The three companies have traded below their market value in June. EQT, for instance, is down 37%.

“While this has been disappointing as a shareholder, we see the pullback as a temporary phenomenon created initially by the commodity price pullback of 2014, which was aggravated more recently by regulatory uncertainties impacting pipeline approvals and/or causing delays to anticipated pipeline takeaway in-service dates,” Hauptfuhrer said.

Range said in a press release that the company wanted to make clear that it has not been contacted by EQT regarding a potential merger of the two companies and doesn’t plan to initiate a discussion itself.

“If EQT or any other entity were to contact Range regarding a potential transaction, Range’s board will evaluate any such potential transaction considering the best interests of its stockholders given the circumstances at the time,” the company said Jan. 3.

Hanold expects that over time, some industry consolidation will occur once natural gas prices stabilize around $3.50 per million British thermal unit—something that could occur within the next 12 to18 months.

“Additionally, specific to Appalachia, better line of sight on infrastructure development in the region should also be in place,” Hanold said.

Hauptfuhrer said that in his career in investment banking, private equity and public equity investing he has never seen a value creation opportunity so compelling. And he was already speculating that a rollup of EQT and Range might easily result in a follow-on acquisition of Antero “given Antero’s PE owners’ [and Antero’s top management’s] need to, and/or likely desire to, monetize their sizeable equity stakes in Antero and the general partner of AM at some point.”

Darren Barbee can be reached at dbarbee@hartenergy.com.