Shares of Eclipse Resources Corp. (NYSE:ECR) tumbled more than 10% by 10 a.m. EDT on Monday after the natural gas driller agreed to combine with Blue Ridge Mountain Resources in an all-stock deal.
Under the terms of the transaction, Blue Ridge shareholders will receive 4.4259 shares of Eclipse Resources' stock for every share they own. The deal values the combined company at $1.4 billion, including debt, with current investors in Blue Ridge expected to hold 42.5% of the combined company after the merger closes, which should occur in the fourth quarter.
The deal will roughly double the size of Eclipse Resources and create a driller focused on the Utica shale operating on a much-larger scale. It will also improve Eclipse's leverage ratio from an elevated 2.8 to a safer 2.1 upon closing, with the line of sight to get that number to 1.5-1.7 in the near term. Finally, Eclipse expects that it will be able to increase production at a more than 20% annual rate while living within cash flow, with the anticipation that the company will start generating free cash flow by 2020.
Eclipse Resources launched a strategic review earlier this year to maximize shareholder value. Instead of selling the company for a premium value, as many investors hoped, the company is merging with a rival at a time when its stock is down sharply for the year. While management believes that the combination with Blue Ridge will create more value for investors over the long term, shareholders remain skeptical; the stock has now lost 94% of its value since its IPO in 2014. Given that abysmal performance, investors are better off considering these top-tier energy stocks instead of holding out hope that the company's new strategy will finally start creating shareholder value.