Southwestern Energy (SWN 5.50, -0.12, -2.14%)
moved higher and then lower on Tuesday following news that the company entered
into a definitive agreement with Flywheel Energy, LLC, a private company backed
by Kayne Private Energy Income Funds, to sell its Fayetteville Shale E&P
and related midstream gathering assets.
Specifically, SWN is going to sell its Fayetteville Shale E&P and related midstream gathering assets for $1.865 bln in cash. Additionally, Flywheel will assume approximately $438 mln of future contractual liabilities after taking into account certain obligations retained by the company.
Southwestern will exit Fayetteville, selling assets which include approximately 915,000 net acres, 4,033 operated producing wells, 3.7 Tcf of proved reserves as of year-end 2017, anticipated 2019 production of 225-230 Bcf and associated midstream gathering infrastructure and compression.
Additionally, Southwestern will transfer to Flywheel at closing certain natural gas hedge positions that the company has or will put in place on behalf of Flywheel. Flywheel will assume $564 mln of contractual obligations, with the company responsible for certain of these potential obligations of up to $126 mln related to unused transportation through 2020.
Financial Strength Post Deal
Following the closing, the company will have pro-forma debt of approximately $2.3 bln. A portion of proceeds will be used to replace cash flow that would otherwise have been generated by the Fayetteville assets and reinvested into SWN’s liquids-rich assets in West Virginia. 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. The company targets a long-term sustainable debt/EBITDA ratio of 2x by 2020.
As a result of the transaction, Southwestern expects additional annualized interest and organizational cost reductions of $60-75 mln. This is incremental to the $110 mln in annualized interest and G&A savings announced in the second quarter. The company expects to offset federal taxes using existing net operating losses.
Subject to its rigorous capital allocation philosophy, the company anticipates deploying up to six rigs in 2019, generating total production growth of 8-12% and liquids growth of 15-25%. For 2020, the company anticipates total production growth in the mid-teens and liquids growth in the mid-twenties. These expected outcomes are dependent upon market conditions and subject to completion of the Company’s annual budget processes.
Southwestern also announced a conditional tender offer for up to $900 mln of its Senior Notes, a share repurchase program of up to $200 mln; and allocation of up to $600 mln over the next two years, in aggregate, supplementing cash flow to further develop the company’s liquids-rich Appalachia assets and accelerate the path to self-funding. Until investments are made, these funds will be used to repay credit facility borrowings.
The commitments under the company’s revolving credit facility are expected to remain at approximately $2.0 bln following the close of the transaction. The transaction, which was unanimously approved by Southwestern Energy’s directors, has an effective date of July 1, 2018, and is expected to close in December 2018.
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