The sale marks Southwestern’s exit from Arkansas and completes the company’s transition to an Appalachian pure-play E&P.
Earlier this year, Flywheel Energy LLC, a private company backed by Kayne Anderson Private Energy Income Funds, agreed to acquire Southwestern’s Fayetteville exploration, production and midstream assets for $1.865 billion in cash. As part of the deal announced in September, Flywheel also agreed to assume about $438 million of future contractual liabilities.
“This strategic transaction represents a further significant step in the transformation of the company,” Bill Way, president and CEO of Southwestern, said in a statement. “We’re now better positioned to leverage our leading technical and operating capabilities to drive greater value from our highly attractive and significant asset base in Appalachia, pay down debt and create even greater financial flexibility.”
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.
Specifically, Southwestern will retire $900 million senior notes and the outstanding balance under its revolver, repurchase stock up to the remainder of the company’s $200 million stock buyback program and invest in Appalachia assets over the next two years.
Southwestern said its fourth quarter production guidance will be impacted by a reduction of roughly 19 billion cubic feet (Bcf) resulting from the sale of the Fayetteville operations.
Southwestern’s Fayetteville Shale business comprised 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 and 230 Bcf in 2019.
Flywheel Energy, the buyer of Southwestern’s Fayetteville Shale business, is a private E&P company formed to acquire and operate large, producing onshore U.S. oil and gas assets with an emphasis on the Rockies and Midcontinent.
The company began as Valorem Energy in early 2017 with backing from the Kayne Anderson Private Energy Income Fund, which Valorem used to acquire interests in the Williston Basin for $285 million. The Flywheel organization continues to retain the Williston assets, according to the company website.
In August 2018, the Kayne Anderson fund committed a second time to the management team with $700 million of equity in the form of the newly-formed Flywheel Energy which was made concurrently with Flywheel’s acquisition of Southwestern’s Fayetteville Shale business.
J.P. Morgan Securities LLC was financial adviser to Southwestern, and Latham & Watkins LLP was the company’s legal adviser for the transaction, which had a July 1 effective date. Houlihan Lokey Capital Inc. also provided certain evaluation services to the company’s board of directors.
Activist investor Elliott Management offered to buy oil and gas producer QEP Resources in an all-cash deal valued at $2.07 billion, saying that the company is "deeply undervalued."
Overall, 2018 was the Year of Consolidation as several E&Ps agreed to merge throughout the U.S., including inside and outside the prolific Permian Basin.
Expect plenty of capital, plenty of volatility, plenty of shifts in investor strategies—and plenty of unfolding stories to track as the new year progresses.