Chesapeake Energy Corp. surged the most in almost six years after announcing plans to sell natural gas and oil shale fields to Southwestern Energy Co. for $5.4 billion in its biggest-ever divestment.
The transaction includes 1,500 wells and drilling rights across 413,000 acres in the southern Marcellus Shale and eastern Utica Shale in Pennsylvania and West Virginia, Oklahoma City- based Chesapeake said in a statement today.
Chief Executive Officer Doug Lawler is exiting some shale prospects to devote drilling crews and rigs to oil-rich formations that have delivered rates of return in excess of 20 percent. Before today, Chesapeake had sold or spun-off more than $3 billion in gas fields, office buildings, pipelines and rigs this year, as it unwinds deals done by former CEO Aubrey McClendon.
“Today’s announcement marks a major step in Chesapeake’s transformation and a dramatic improvement in our financial strength as we seek to maximize value for our shareholders,” Lawler said in the statement.
The transaction, which is expected to close before the end of the year, won’t impact Chesapeake’s production growth targets, Lawler said. Chesapeake, which before today had lost 31 percent of its value this year, climbed 17 percent at 1:24 p.m. in New York, after earlier rising to $21 for the biggest intraday gain since Dec. 10, 2008.
Southwestern tumbled as much as 9.9 percent to $32.15 for the largest intraday slump since September 2011 as investors punished the Houston-based company for paying a premium that UBS Securities LLC said was 54 percent more than Chesapeake’s assets were expected to fetch.
For Southwestern, the transaction represents the first major foray into oil-rich shale after focusing almost exclusively on gas production. Wells that are part of the deal produce the equivalent of 56,000 barrels of crude a day, 45 percent of which is oil and so-called gas liquids such as propane. The acquisition also is Southwestern’s largest-ever deal, according to data compiled by Bloomberg.
The purchase will increase Southwestern’s reserves by one- third to the equivalent of 890 million barrels of crude at a cost of about $24 per barrel.
“We think the sale is transformational for both parties,” Scott Hanold, an analyst at RBC Capital Markets, said in a note to clients today.
A shortage of gas-processing plants and pipelines in the Appalachian region could delay Southwestern’s plans to expand output from its new assets. Those bottlenecks should ease in the coming years as more infrastructure is added, Hanold wrote.
In an internal e-mail today, Lawler announced plans for a town hall-style meeting with employees on Oct. 20 to discuss the impact of the sale and long-term growth plans. Senior managers and human resources executives have already met with employees at the affected divisions to talk about the transition to Southwestern, he said in the e-mail.
Chesapeake’s bonds surged and the cost to protect its debt declined. The company’s $1.1 billion of 5.75 percent notes due March 2023 climbed 5.5 cents to 108.5 cents on the dollar at 10:19 a.m., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $1.3 billion of 6.625 percent notes maturing in August 2020 rose 5.5 cents to 112.5 cents on the dollar.
The company’s 5-year credit-default swaps declined 70 basis points to 234 basis points, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps, which typically fall as investor confidence improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Chesapeake announced plans in July to expand in the Rocky Mountains amid Lawler’s campaign to reduce costs, unload unprofitable gas fields and untangle complex financing arrangements created during the reign of his predecessor.
Since becoming CEO two months after McClendon’s dismissal in April 2013, Lawler has outperformed the average gas and oil production estimates of analysts in quarterly Bloomberg surveys.
Southwestern expects to sell equity and debt before closing to finance the transaction. Bank of America Corp. advised Southwestern and will provide a $5 billion bridge loan.
Statoil ASA, co-owner of some of the West Virginia and Pennsylvania assets, has 30 days to acquire the stake at the agreed price, Southwestern said.