A version of this story appears in the September 2017, edition of Oil and Gas Investor. Subscribe to the magazine here.

Despite orbiting far from the bright center of the A&D universe—read Permian Basin—deal making has been brewing in Appalachia for the past 18 months.

The basin’s momentum shift became clear in late June with EQT Corp.’s (NYSE: EQT) announcement that it had engineered a deal to become the largest U.S. natural gas producer by acquiring Rice Energy Inc. (NYSE: RICE).

The $8.2 billion merger helped push second-quarter Marcellus Shale deals to $10.22 billion compared to the Permian Basin’s $4.4 billion, according to a PwC report in July.

The back and forth among E&Ps, analysts and industry experts is whether the Marcellus can keep up its surprising deal pace as some argue the play’s long distance from LNG terminals could be a limiting factor for future activity. Some see the abundance of the Marcellus’ enormous resources as a clincher, however—particularly for deal makers investing in the long term.

But deals generally targeted more varied plays during the past six months. Sanchez Energy Corp.’s (NYSE: SN) $2.1 billion Eagle Ford deal closed and the Scoop play in Oklahoma finalized a $1.8 billion transaction. Gas assets in the San Juan and Piceance also attracted new interest.

In the south, the Permian remained a deal factory. In the first quarter, the basin churning out a high volume of big-ticket transactions before the pace slackened in the second quarter. In total, the Permian racked up $25.85 billion in announced first-half deals, according to PwC.

First-Half 2017 Deal Value

First-Half 2017 Deal Volume

RELATED: Permian Basin’s $21 Billion Haul Leads Record First-Quarter A&D Activity

Still, gas seems to have regained some of its appeal because it offers E&Ps a more stable price compared to oil and wells that can be drilled economically, Keith Buchanan, managing director and head of KeyBanc Capital Markets’ Oil and Gas Group, told Hart Energy.

“Gas has become more of a predictable commodity rather than oil which has more volatility due to geopolitical activity,” Buchanan said.

Marcellus Harbinger?

The EQT/Rice merger—set to create an Appalachian colossus—could be a precursor for the direction of the A&D market for the next few years, Art Krasny, managing director for Wells Fargo Securities, said at Hart Energy’s DUG East conference in Pittsburgh. Attendees at the conference buzzed with excitement from EQT’s announcement made days before.

Keith Buchanan, managing director and head of KeyBanc Capital Markets Inc.’s oil and gas group.

For more than a year, Krasny has seen Appalachia’s deal flow escalate, along with values. Rice itself was a consolidator last year, buying Vantage Energy LLC in a $2.7 billion deal.

Incumbent companies, such as EQT and Antero Resources Corp. (NYSE: AR), have dominated the basin’s A&D activity through bolt-on acquisitions—sometimes between one another.

Like the Permian, management teams in the Marcellus and Utica have also channeled private equity money as they hunt for acreage. They may be getting their chance as large independents, such as Anadarko Petroleum Corp. (NYSE: APC) and Noble Energy Inc. (NYSE: NBL), are lured to the oil wonderland in West Texas and Southern New Mexico.

“That’s what I see as the next chapter right now: I see the incumbents consolidating around the cores; I see private equity picking up positions that have become known core from the guys that are exiting and focusing elsewhere; and then we’ll see selective M&A flow as well,” Krasny said.

Christopher Kalnin, managing director and co-founder of Kalnin Ventures LLC, is among the players looking to build a position in the shale. Kalnin Ventures, backed by a private equity and international capital hybrid, has a $500 million equity commitment from Thailand-based investor Banpu Pcl.

Since last year, Kalnin expected low commodity prices and midstream commitments to drive Marcellus companies to consolidate.

EQT’s agreement to buy Rice made sense, Kalnin said at the Pittsburgh conference. The Marcellus finds itself with the window cracked open, allowing transactions to pick up as upstream players are forced to “redistribute the deck”—rethinking strategies, portfolios and pipeline commitments, Kalnin said.

“If you look at the upstream players versus the midstream players in the [Appalachian] basin, you really do see a lot more fragmentation on the upstream side. I think it’s inevitable that the upstream really consolidates over the next three to five years,” he said.

Permian, Permian, Permian

EQT’s merger with Rice was driven by the typical merger rationales: “synergies” through a reduction of operation costs and overhead.

Rice’s acreage also compliments EQT’s. The company expects to increase its average lateral length in core counties such as Greene and Washington Pennsylvania by 50%.

Importantly, the deal also allows EQT to access “premium Gulf and Midwest markets” through combined firm transport agreements by taking ownership of Rice’s midstream affiliate Rice Midstream Partners.

Bill Marko, managing director at Jefferies’ Energy Investment Banking Group.

The Marcellus has fought a long battle against pipeline constraints and largely lacks access to important areas where LNG is likely to ship. That may make other gas plays more attractive in the short-term.

While the Marcellus holds massive reserves, the Gulf Coast is well placed for LNG export capabilities, Bill Marko, managing director at Jefferies’ Energy Investment Banking Group, told Hart Energy.

The U.S. is expected to become a net exporter of natural gas by 2018 driven by growth in LNG exports, according to the Energy Information Administration.

“The Marcellus, one day, will be the biggest gas field in the world I think—as big or bigger than the North Field in Qatar—and it will continue to grow over time,” he said.

But the Eagle Ford, Haynesville, Oklahoma or other gas supplies offer a “ready-made market at the Gulf Coast that seems to make more sense because of proximity and existing midstream infrastructure,” Marko said.

Buchanan said he anticipates more A&D activity in multiple basins. In particular, he sees more in-basin consolidation—in the Permian or the Appalachian Basin—continuing.

“Those are probably the two biggest ones where we have pretty mature and large enough basins where you have enough participants to get significant consolidation,” he said.

Buchanan also noted the number of SPACs, or special-purpose acquisition companies, led by all-star oil and gas veterans—notably Stephen Chazen, former CEO at Occidental Petroleum Corp. (NYSE: OXY), and James T. Hackett, former board chairman and CEO of Anadarko Petroleum—that have recently surfaced.

“Those are some pretty big names and big checkbooks with big sponsors behind them,” he said. “I think they can certainly be a part of the story in A&D activity over the next six months.”

RELATED: Atlas Energy Founder Opens Blank-Check Company’s IPO

Overall, Marko is bearish about M&A conditions in the near-term due to depressed oil prices. Gas prices, while stable, may not have much upside. Consolidation efforts will continue in Appalachia, despite his view of the EQT/Rice deal as a “one-off.”

Through the end of the year, Marko expects the Scoop/Stack, Eagle Ford, Haynesville and mostly the Permian attracting buyers.

Top 10 Upstream Deals - First-Half 2017

“The Permian is where the action is and where the action will continue to be in terms of the number of deals,” Marko said.

Counter-play

The contrarians see the Marcellus as a long-term investment—one that, for now, requires “patient capital,” Kalnin said.

Christopher Kalnin, managing director and co-founder of Kalnin Ventures.

“There’s no place in the world where the gas can be produced at such a price and delivered to end markets at such a price,” he said.

By 2020, the U.S. is forecast to account for 40% of the world’s extra gas production and will constitute a one-fifth of global gas output, the International Energy Agency said in a July report. The Marcellus is expected to increase production between 2016 and 2022 by 45%.

Since 2016, Kalnin Ventures has acquired nonoperated interest in about 50 MMcf/d of producing assets and about 300 Bcf of 1P reserves in the Marcellus through four transactions totaling about $270 million.

Roughly a decade after Range Resources Corp.’s (NYSE: RRC) wells began to venture sideways through the Marcellus underground, Kalnin sees himself going against the grain to invest in the play.

“My belief is if you do what everyone else is doing the only way you make money is in a bubble,” he said. “I have never seen that as a good strategy for investing.”

Kalnin also disagrees with the binary thinking that oil fuels transportation while gas is relegated to heating and power generation.

“We see natural gas as really being the driver of future transportation,” he said.

Emily Patsy can be reached at epatsy@hartenergy.com.