Oil and Gas A&D Trends: Giddy or Giddy Up?

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Chesapeake Energy Corp.’s recent vibe, to put a word to it, has been decidedly bubbly.

Perhaps it’s the Jan. 25 announcement that the company would purchase Chief Oil & Gas while simultaneously offloading its Powder River Basin assets to Continental Resources Inc. With the stroke of a pen, or maybe it was a quill, the company ignited about $3 billion in deals that briefly sent the company’s stock 5% higher in trading.

Maybe it’s the presence of Mike Wichterich, executive chairman, who held a tongue-in-cheek NAPE keynote under the pretext he was precluded from speaking about Chesapeake. Probably safest to keep Wichterich away from the PA system altogether.

Still, a sense of ebullience has crept back into Chesapeake after it quietly slipped out of bankruptcy last February.

Its November capture of Vine Energy Inc. in a $2.2 billion zero-premium merger kept the company from adding debt, added production, 227,000 net acres in the Haynesville Shale and Mid-Bossier and, most importantly, cash flow. The company said that the deal increased Chesapeake’s five-year free cash flow by $1.5 billion, or about 68% of the transaction value.

Then the more recent deals only added to the M&A fun. And by fun, this is when the allegedly muzzled Wichterich could help himself.

“We can’t talk about the $5 billion in transactions this year? We can’t talk about the billion-dollar buyback?” Wichterich asked playfully.

Yes, Chesapeake is back to swinging big deals for the first time since 2018, when the company rushed into the Eagle Ford Austin Chalk with a nearly $4 billion deal that gave it, abruptly, oil production.

Its more recent deals, including the acquisition of Chief Oil & Gas, returned the company to its more familiar natural gas dealmaking.

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At the NAPE event in Houston, Chesapeake president and CEO Nick Dell’Osso gave some additional insight into the Chief deal and the now roughly three-year-old merger with WildHorse Resource Development Corp.

“We believe very strongly in the ability to optimize capital across the portfolio when you have more than one place to put the money,” Dell’Osso said.

“It’s just like a portfolio of stocks; if you have more than one stock in your portfolio, you can optimize returns with some diversification,” he said. “We think that’s absolutely true for a portfolio of oil and gas assets.”

Dell’Osso recently told the Financial Times that oil will remain important to Chesapeake, and its Texas position is not for sale.

“We are committed to the Eagle Ford,” he said.

While analysts see the Chief deal as a return to gas, Dell’Osso “wouldn’t necessarily describe it that way.” Oil will still generate 25% of its cash flow after the deal, he told the Times.

Chesapeake’s sale of its oily Powder River Basin position to Continental Resources was different, Dell’Osso said at NAPE. He said the position simply wouldn’t be able to compete for capital in the Chesapeake portfolio, meaning it was always going to lose out to the company’s Eagle Ford holdings. Continental purchased the asset for $450 million, according to Fitch Ratings.

“The Powder wasn’t very big,” he explained.

“It was going to be really expensive to get big. “It was a tougher fit, and Continental is going to do well with it because they are going to be big in the basin. … They’re going to consolidate it in with the other stuff they’re doing,” he said.

Despite its recent moves, some analysts are slightly skeptical.

Wells Fargo analyst Nitin Kumar said in a Jan. 31 report that Chesapeake’s post-bankruptcy finances and “friendlier midstream contracts bode well.” Wells Fargo rated Chesapeake overweight with a price target of $88, which would propel the company from its current value to a $10 billion company.

But, “we think there is also a significant bridge to gap with the investment community following years of difficult decisions that led the company into Chapter 11 in 2020,” Kumar said. “Overall, there is strong potential for sustained FCF [free cash flow] generation, given the new operating plan, which should be attractive to investors, especially given the current discounted valuation.”

Even Fitch Ratings couldn’t pour any cold water on the recent Chief Oil deal, saying the company’s credit quality could improve as it retains a conservative financial approach.