Southwestern Energy Co. (NYSE: SWN) said Sept. 4 it will exit Arkansas’ Fayetteville Shale in a deal worth more than $2 billion as the company transitions to an Appalachian pure-play E&P.
The long-awaited sale of Southwestern’s Fayetteville Shale business is with Flywheel Energy LLC, a private company backed by Kayne Private Energy Income Funds. Flywheel agreed to acquire the E&P and related midstream gathering assets for $1.865 billion in cash. In addition, the private E&P also agreed to assume about $438 million of future contractual liabilities.
Southwestern’s Fayetteville Shale business consists of 915,000 net acres, 4,033 operated producing wells and associated midstream gathering infrastructure and compression on the Arkansas side of the Arkoma Basin. Proved reserves as of year-end 2017 were 3.7 trillion cubic feet, and production is expected to range between 225 billion cubic feet (Bcf) and 230 Bcf in 2019.
Based on second-quarter 2018 Fayetteville production of 736 million cubic feet equivalent per day (MMcfe/d), the sale implies a value of roughly $2,500 per flowing Mcfe/d excluding midstream value, said Zach Parham, equity analyst with Jefferies LLC.
“While getting a sale completed in a tough market for gas assets will likely be viewed positively, we believe investors may have wanted more debt reduction/cash return vs. utilizing proceeds to outspend cash flow to drive additional growth,” Parham said in a research note on Sept. 4.
Southwestern plans to use proceeds from the Fayetteville sale to pay down debt, buy back stock and accelerate activity in southwest Appalachia in West Virginia.
Following the closing, Southwestern expects to have pro-forma debt of roughly $2.3 billion. The resulting increase in activity in West Virginia is expected to accelerate the company’s path to self-funded growth in production and shareholder value. Southwestern targets a long-term sustainable debt/EBITDA ratio of two times by 2020.
Earlier this year, Southwestern launched plans to reposition its portfolio to focus on its position in the Appalachian Basin, where it holds more than 475,000 net acres prospective for Upper and Lower Marcellus, Upper Devonian and Utica/Upper Point Pleasant development.
Bill Way, president and CEO of Southwestern Energy, said the company’s transaction with Flywheel is a “significant milestone” in advancing its strategic plan.
“The sale of Fayetteville represents a pivotal and deliberate step towards fulfilling our promise to reposition Southwestern Energy to capture greater returns from our higher margin Appalachia assets,” Way said in a statement.
Southwestern said it anticipates closing the sale in December. The transaction, which has an effective date of July 1, was unanimously approved by Southwestern’s directors.
J.P. Morgan Securities LLC was financial adviser to Southwestern, and Latham & Watkins LLP was the company’s legal adviser. Houlihan Lokey Capital Inc. also provided certain evaluation services to the company’s board of directors.
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