To reposition portfolio, Southwestern Energy Company SWN has inked a definitive agreement for the divestment of Fayetteville Shale E&P and related midstream gathering assets with Flywheel Energy, LLC — a private company backed by Kayne Private Energy Income Funds.
Transaction Details
The company will raise cash proceeds of $1.865 billion from this sale. Moreover, through the transaction, Southwestern Energy will also offload future contractual liabilities of about $438 million. While some of the obligations related to unused transportation through 2020 will be retained by the company amounting to about $126 million. The directors of Southwestern Energy unanimously approved the transaction, which will have an effective date of Jul 1, 2018 and is anticipated to close in December 2018.
The Fayetteville assets include about 915,000 net acres, 4,033 operated producing wells, 3.7 Tcf of proved reserves as of year-end 2017, estimated 2019 production of 225-230 Bcf and related midstream gathering infrastructure and compression.
Post-Closure Status
On completion of the transaction, Southwestern Energy’s pro-forma debt will be about $2.3 billion. A part of the cash flow that would have been generated by the Fayetteville assets will be replaced with the sale proceeds and reinvested in the company’s liquids-rich assets in West Virginia. The enhanced activity in West Virginia is likely to aid the company in boosting production and shareholder value. By 2020, Southwestern Energy targets a long-term sustainable debt/EBITDA ratio of 2x. The commitments under the company’s revolving credit facility are expected at about $2.0 billion following the close of the transaction. However, the transaction is likely to result in annualized interest and organizational cost reductions of $60-75 million. The Company expects to offset federal taxes using existing net operating losses.
Per the company’s capital allocation policy, Southwestern Energy expects to employ about six rigs in 2019, resulting in total production growth of 8-12% and liquids growth of 15-25%. For 2020, the company expects total production growth in the range of 13-19% and liquids growth in the band of 20-29%.
Southwestern Energy proposes to focus on Southwest Appalachia’s high margin, liquids-rich inventory, where the total production has been growing more than 60% since 2016. The company has a net acreage of more than 475,000 in the Appalachia Basin prospective for Upper and Lower Marcellus, Upper Devonian and Utica/Upper Point Pleasant development. Southwestern Energy has established more than 40 trillion cubic feet equivalent (Tcfe) of resource, which comprises more than 1,800 economic drilling locations below $2.75 per thousand cubic feet (Mcf) gas and $50 per barrel oil in the region. As of year-end 2017, the company’s Appalachian reserves were 11.1 Tcfe, 33% of which were condensate and natural gas liquids.
The transaction is in line with the company’s strategy to streamline operation and focus on Southwest Appalachia’s high margin, liquids-rich assets. It will also improve the balance sheet and raise shareholders’ value.
In another announcement, the company declared a conditional tender offer for about $900 million of senior notes as well as a share repurchase program of about $200 million. Southwestern Energy also intends to apportion about $600 million over the next two years to boost liquids and value growth.
Price Performance
In the past year, Southwestern Energy’s shares have lost 4.6%, against the industry’s 19.4% rise.
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Zacks Rank & Other Stocks to Consider
Southwestern Energy currently carries a Zacks Rank #2 (Buy).
A few other top-ranked players in the same sector are Petroleo Brasileiro S.A. PBR, or Petrobras SA, Helix Energy Solutions Group, Inc HLX and TC Pipelines, LP TCP. All these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Petrobras is the largest integrated energy firm in Brazil and one of the major players in Latin America. It pulled off an average positive earnings surprise of 10.4% in the last four quarters.
Helix Energy offers specialty services to the offshore energy industry. The company delivered an average positive earnings surprise of 66.7% in the trailing four quarters.
TC Pipelines purchases, owns and actively participates in the management of U.S.-based natural gas pipelines and related assets. The company delivered an average positive earnings surprise of 3.7% in the last four quarters.
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