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There were $250 billion worth of deals in the U.S. oil and gas industry in 2023, and the trend doesn't seem to be slowing down in 2024.
The latest deal occurred in the natural gas sector on March 11, when soon-to-be No. 2 U.S. natural gas producer EQT Corporation (EQT) said it agreed to buy Equitrans Midstream (ETRN) in an all-stock deal that values its former pipeline unit at about $14 billion, including debt. Each share of Equitrans common stock will be exchanged for 0.3504 share of EQT.
The backdrop for this deal is a global gas glut that has pummeled prices, forcing producers to curb output and spending on drilling activity. EQT itself is cutting nearly 1 billion cubic feet per day (bcfpd) of natural gas production this month.
The deal creates a $35 billion integrated natural gas giant, and will allow EQT to lower costs to produce and transport its natural gas (NGJ24) to market by adding more than 2,000 miles of pipelines. The company’s current portfolio consists of more than 4,000 drilling locations in Pennsylvania, West Virginia, and Ohio, a region that is one of the centers of gas production in the U.S.
In effect, this announcement completely undoes the spinoff of Equitrans in 2018 - a move that EQT completed under pressure from activist investor Jana Partners.
EQT also says the deal will give the company more control in gaining access to markets for gas. In addition, it will help address the expected jump in power usage driven by artificial intelligence (AI) in the region.
AI and Energy
Equitrans is the lead partner and operator of the controversial 303-mile Mountain Valley natural gas pipeline, the only big gas pipeline under construction in the Northeast. It will deliver gas from West Virginia to Virginia, and has encountered a number of regulatory and court fights that have stopped work several times since construction began in 2018.
During the conference call with analysts discussing the deal, EQT CEO Toby Rice talked up its potential to meet an expected rise in power demand stemming from the use of AI in the region. (Northern Virginia is home to the world’s largest concentration of internet servers.)
There is logic to what he says - natural gas is the single largest source of electricity generation in the U.S., and after decades of little demand growth, projections for electricity consumption are now suddenly pointing up. Electric utilities and regulators have been caught off guard by the biggest surge in demand in a generation.
Electricity consumption at data centers alone is poised to triple from 2022 levels, to as much as 390 terawatt hours by the end of the decade, according to Boston Consulting Group. That’s equal to about 7.5% of the nation’s projected electricity demand.
More specifically, the grid operator for the PJM network - which serves a broad section of the mid-Atlantic states - tripled its growth forecast for the region earlier this year, citing the proliferation of data centers. By 2027, data center capacity in the PJM plus Southeast markets - both targets for the Mountain Valley pipeline’s gas - is expected to almost double. That means a lot more demand for power.
Exploding data center demand is also the reason why Dominion Energy (D) is planning to spend nearly a billion dollars on a new transmission line in northern Virginia's “data center alley.”
Why Buy EQT Stock?
Assuming the AI revolution is still in its infancy, we are about to witness a large increase in demand for electricity across many parts of the U.S.
In January, CEO Sam Altman of OpenAI said, “We do need way more energy in the world than we thought we needed before. We still don’t appreciate the energy needs of this technology.”
Data centers are the backbone of our digital economy. Their 24/7 operations and large cooling systems require vast amounts of power, and the recent boom in AI and cryptocurrency is helping drive the industry’s electricity consumption to previously unseen levels.
ChatGPT, for example, uses nearly 10 times as much electricity than Google search, according to the International Energy Agency (IEA). And AI is now expected to consume 10 times more power by 2026 than it did last year.
Natural gas and EQT will play a part in meeting those rising energy demands.
The Equitrans deal is expected to help lift profit margins for EQT by gaining better control of pipeline costs and processing, as EQT pushes to get more global gas price exposure via liquefied natural gas (LNG) export markets.
"This vertical integration positions EQT as the lowest cost natural gas producer in the United States," said CEO Toby Rice. That’s a good position to be in.
Despite all of this, Wall Street hates the deal, pushing EQT stock down over 8%. This gives us a good entry price on EQT. Buy it below $37.
