Please ensure Javascript is enabled for purposes of website accessibility

Why Eclipse Resources Corp's Stock Is Sinking Today

By Matthew DiLallo - Aug 27, 2018 at 10:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors didn't like the natural gas driller's latest decision.

What happened

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.

So what

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.

A natural gas well with pipelines at sunset.

Image source: Getty Images.

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.

Now what

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.