Private equity buys up another gas asset

Southwestern Energy (ticker: SWN) announced a major sale today, divesting its Fayettville shale properties for $1.87 billion in cash.

Southwestern has been a major player in the Fayettville for the entire history of the play, and the company holds over 900,000 acres in the basin. According to RBC analyst Scott Hanold “Southwestern probably has the best Fayetteville position. These guys discovered the play and they were leasing before everyone else.”

Southwestern Exits Fayetteville, Becomes Appalachian Pure-Play

This acreage is highly developed, with over 4,000 producing wells, 2,000 miles of gathering pipelines and 50 compression stations. Southwestern’s Fayettville assets are currently producing a net 716 MMcf/d. Despite this, however, Southwestern reports there are significant opportunities remaining, with 850 gross drilling locations at $3.00 gas and $50 oil.

The sale is a major shift for Southwestern, transforming the company into a pure-play Appalachia producer. The Fayetteville position represents about 29% of the company’s current production and 25% of its reserves. The play also accounts for about 25% of Southwestern’s gross drilling locations at $3.00 gas and $50 oil.

Privately-held Flywheel Energy, which is backed by Kayne Private Energy Income Funds, will pay Southwestern a total of $1.865 billion in cash, and will assume about $438 million in future contractual liabilities. This price equates to $0.50 per Mcf of reserves, or $2,600 per flowing Mcfe.

Funds split between debt, share repurchases and drilling program

Southwestern has already laid out its plans for using this cash, spreading the windfall across debt reduction, share repurchases and boosting growth. The company plans to pay back $900 million in debt, repurchase $200 million ins shares and invest the remaining funds over the next two years in its drilling program. This will allow Southwestern to run six rigs in 2019, generating production growth of about 10%.

This sale extends a recent trend seen in Appalachia, private equity producers are acquiring significant gas assets. This makes sense, as equity markets appear to have an unfavorable view of gas at present, meaning such assets are inexpensive. The expansion of private interest is significant, as it shows that opportunities are not limited to the Marcellus.

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