Southwestern Energy to acquire Chesapeake assets

December 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

On 16 October, the Southwestern Energy Company announced that it had agreed to acquire a number of oil and gas assets from its rival Chesapeake Energy Corporation. The deal is worth approximately $5.37bn.

Under the terms of the deal, Southwestern will take control of 435 of Chesapeake’s horizontal wells, 256 of which are operated and producing on the Marcellus and Utica shale formations. An additional 179 are nonoperated or nonproducing in the same region. The deal, which is expected to close by the end of the year, will also see Southwestern take control of 413,000 net acres and about 1500 wells in northern West Virginia and southern Pennsylvania. Southwestern also will assume a portion of Chesapeake’s firm transportation and processing capacity commitments as per the terms of the transaction.

Although the deal will see a sizable portion of the company’s assets transferred to Southwestern, Chesapeake does not believe that the asset sale will have a significant impact on the company’s growth prospects, as the assets are not considered a core part of its growth plans. Accordingly, the company still expects to deliver a production increase in 2015. In a statement announcing the deal, Chesapeake’s chief executive Doug Lawler said “We expect our full-year production guidance for 2015 to remain in the range of 7-10 percent growth from 2014 levels adjusted for asset sales... We look forward to deploying the proceeds from this significant transaction in ways that will continue to drive even greater shareholder value.”

Southwestern has high hopes for the Marcellus assets in particular. Chesapeake previously operated just one oil rig in the area, but Southwestern has announced that it intends to start operations in the region with between four and six rigs in 2015, rising to 11 rigs by 2017. The firm believes that it can drill in Marcellus for a minimum of 20 years maintaining that 11-rig pace. Steve Mueller, chief executive of Southwestern, said “Southwestern already has leading positions in two world class projects in our Fayetteville shale and northeastern Pennsylvania Marcellus assets and both will continue delivering highly economic production and reserve growth for many years. With this acquisition, we will have secured a complementary third premier acreage position.”

The asset sale by Chesapeake, which is based in Oklahoma, represents the next phase in the company’s realignment. In the pre-financial crisis years, investors lined up to plough money into a firm that was at the vanguard of the US shale revolution. Today, however, the company finds itself with $11.5bn worth of debt. In recent years, Chesapeake has been required to shed around 16 percent of its overall workforce as the reorganisation has continued. As a result of its efforts, the firm has been able to somewhat reduce its debt, which peaked at $16.2bn in 2012. The spending tactics employed by the company’s co-founder and former chief executive Aubrey McClendon put pressure on the company’s finances and he was eventually forced out in April 2013. His profligacy led to increased pressure from Chesapeake shareholders, including activist investor Carl Icahn. The company’s aggressive push for growth under the leadership of Mr McClendon saw Chesapeake’s level of investment quickly outstrip its operating cash flow.

Chesapeake’s restructuring has seen the company shed assets for some time. A considerable portion of the firm’s portfolio has been sold since 2013. Last year, Southwestern acquired 162,000 acres in northeastern Pennsylvania from Chesapeake for around $93m. Arguably, however, the firm’s southern Marcellus and southwestern Pennsylvania portfolios have been most affected by the divestments. In May 2013, Chesapeake sold approximately 99,000 acres in southwestern Pennsylvania to EQT Corporation for $113m. July 2014 also saw the company sell a further 22,000 acres in southwestern Pennsylvania to Canonsburg-based Rice Energy for $336m.

Richard Summerfield