As producers are stuck with the meat and potatoes of the commodities market, Rice Energy Inc. (NYSE: RICE) is aiming for its sweet spot in the Marcellus and Utica—Greene County, Pa.

Rice said April 12 that it plans to acquire 27,400 net Marcellus acres that are directly next door to its core Greene County position. The acreage, which is held by bankrupt Alpha Natural Resources, includes 23,500 net acres of stacked potential for the Utica shale.

The path to the $200 million deal has a number of orange traffic cones to dodge—including other potential bidders and sharing the acreage with coal mining operations.

Rice expects to be named the “stalking horse bidder,” so its offer must be approved by the bankruptcy court. Alpha may also be required to hold an auction for the assets before closing the acquisition.

Rice is conducting an equity raise, selling off 20 million shares and diluting ownership by 13% to help support the transaction.

As of December 2015, Rice had about $1.1 billion of liquidity, including about $450 million of cash and a $650 million credit facility.

Right Price, Vague Time

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Rice said it doesn’t anticipate changes to its capex, which is about $640 million in 2016. The company anticipates production growth of 34%—up to 750 million cubic feet equivalent per day.

However, the company would acquire Marcellus acreage at $6,600 per acre, increase its inventory to 182 net Marcellus and 50 net deep Utica locations, said Gordon Douthat, Wells Fargo Securities senior analyst.

“Overall we like the acquisition which makes strategic and economic sense for Rice in our view, with acreage in the core, acquired at a decent price, with operational synergies both for Rice and Midstream Partners (NYSE: RMP),” he said.

The acquisition would allow RMP to provide midstream services through connections to existing systems, said Gabriele Sorbara, analyst for Topeka Capital Markets.

Rice said the core acreage is directly adjacent to “our existing proved developed Marcellus position in Greene County and increases our inventory of low-risk, core dry gas Marcellus locations by 37%. Additionally, the producing royalty interests and the emerging deep Utica acreage provide a compelling mix of near-term cash flows and long-term significant resource potential.”
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The undeveloped acreage Rice wants to buy is 44% HBP. Returns of 40% are possible at strip pricing as of April 8 and the holdings have comparable geology that is de-risked by adjacent well results.

Greene Stalks

Rice has built in some bid protections, such as break up fees and expense reimbursements, which are subject to court approval. Rice is providing a $20 million deposit. If a judge approves Rice as the stalking horse bidder, it would be protected by a $2 million break fee and expense reimbursements of up to $1.5 million.

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The agreement also provides protections for Alpha’s related coal mining business—essentially a surface sharing agreement that coordinates extraction to the various hydrocarbons.

As with any stalking horse scenario, Alpha will continue to market the assets, with it believes “have substantial ongoing interest.”

“The stalking horse bid will set an appropriate starting point for the continued marketing of the … assets to other bidders with the goal of improving the price ultimately achieved for these assets,” the company said in bankruptcy filings.

Rice and Alpha agreed that any competing bids will be in cash and subject to a bidding increment of $1 million.

Toby Rice, president and COO, said the prospective acreage acquisition is consistent with the company’s Alpha and various subsidiaries filed Chapter 11 bankruptcy protection in August.

Jones Day, Jackson Kelly PLLC and Hunton &Williams LLP are serving as Alpha’s legal advisers and Rothschild is serving as its financial adviser. Vinson & Elkins LLP is serving as Rice Energy's legal adviser and Lazard is serving as its financial adviser.

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