SilverBow May Hunt for More Eagle Ford Scale After $700MM Deal

SilverBow Resources is adding greater scale in the Eagle Ford as Chesapeake Energy exits the basin to focus on gassier regions.

Oklahoma City-based Chesapeake Energy Corp. lined up a deal to sell its remaining South Texas acreage to Houston-based SilverBow Resources Inc. for $700 million, the companies announced Aug. 14.

SilverBow agreed to pay $650 million in cash at closing, another $50 million cash in a deferred payment 12 months after closing—and a possible $50 million contingency payment based on future commodity prices.

The deal came together after nearly a year of evaluation and discussions between SilverBow and Chesapeake, SilverBow CEO Sean Woolverton said during an Aug. 14 conference call with analysts.

“The strategic impact of this transaction is transformational for SilverBow as we expect to become the largest public pure-play Eagle Ford operator on a pro forma basis,” Woolverton said. “This transaction marks the eighth acquisition that we have made over the last two years and represents the largest to date.”

The deal is expected to add between 31,000 boe/d to 33,000 boe/d of net production to SilverBow’s Eagle Ford footprint during the fourth quarter.

SilverBow estimates that the PDP PV-10 value of the acquired production is about $850 million based on Aug. 4 strip prices. Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co. LLC, said the firm’s estimates are closer to $600 million based on current prices.

On top of adding production, the deal also deepens SilverBow’s drilling runway in South Texas with undeveloped inventory.

SilverBow will add about 300 gross drilling locations in the Eagle Ford and Austin Chalk, with about two-thirds of the incremental inventory in the Chalk and one-third in the Eagle Ford, Woolverton said.

The company also believes there are more benches within both the Eagle Ford and Austin Chalk that SilverBow can target beyond the 300 future locations, he said.

“We like that there’s a ton of inventory that’s well delineated, well proven-out by drilling on the asset, as well as by offset activity,” Woolverton said. “Then, as we always do, we think we’ll unlock incremental inventory as we take control of the asset.”

Chesapeake’s capital program for its legacy South Texas asset ran two rigs and one frac crew. Chesapeake is bringing 16 wells online there in the immediate future—and SilverBow likes that it’s acquiring the asset as production ramps up, he said.

SilverBow anticipates a similar level of drilling activity after taking control of the asset; analysts at Truist Securities are forecasting a one-rig, one-frac crew program for the acquired assets.

SilverBow intends to finance the transaction using cash on hand and debt. The deal is expected to be “leverage neutral” at the end of 2023, and SilverBow aims to reach a 1.0x leverage ratio by year-end 2024.

“There’s a significant amount of free cash flow that’s going to be generated from [the asset],” Woolverton said. “We’re going to quickly de-lever the asset so there will be additional capacity within the balance sheet to do future deals.”

Woolverton said SilverBow equity could be a currency the company uses longer-term on other acquisitions. While the SilverBow A&D team has been focused on landing the Chesapeake deal, there are other opportunities in the company’s sights, he said.

RELATED: Chesapeake Energy Exceeds Expectations with $700MM Eagle Ford Sale

Chesapeake aims for gas glory

With its latest divestment package, Chesapeake finished the selloff of its Eagle Ford footprint for about $3.53 billion—largely in-line with market expectations, according to analysts at Jeffries Equity Research.

In February, Chesapeake struck a deal to sell its black oil Eagle Ford assets to INEOS Energy, a subsidiary of British chemical company INEOS Group, for $1.4 billion; the transaction closed in May.

Chesapeake sold its Brazos Valley acreage footprint to WildFire Energy I for $1.425 billion earlier this year.

Chesapeake’s exit from the Eagle Ford transitions the E&P into a pure-play natural gas company focused on positions in the Marcellus and Haynesville shale plays, Chesapeake President and CEO Nick Dell'Osso said in a news release.

The company anticipates that proceeds from the latest Eagle Ford divestment will further enhance its balance sheet and share buyback program.

Truist Securities analyst Neal Dingmann wrote in an Aug. 14 report that the proceeds could also drive future acquisitions for Chesapeake.

“Outside of acquisitions/repurchases we expect the company to focus on increasing its LNG exposure, through both U.S. & international based pricing agreements,” Dingmann said.

Chesapeake entered into a heads of agreement (HOA) to Energy Transfer’s Lake Charles LNG project to supply the liquefaction facility with volumes of natural gas to produce 1 million tonnes per annum of LNG, Chesapeake said in second-quarter earnings on Aug. 1.

After liquefaction, the LNG will be purchased by trading house Gunvor Group Ltd. under a previously announced 15-year agreement.

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