Southwestern Energy to sell Fayetteville Shale assets in Arkansas

Houston (Platts)--8 Feb 2018 722 pm EST/022 GMT

Southwestern Energy Thursday said it plans to put its legacy Fayetteville Shale assets in Arkansas up for sale. Upstream and midstream assets there could fetch proceeds of $2 billion, one analyst said.

The Houston-based producer will "actively pursue strategic alternatives" for its exploration-and-production and the midstream gathering assets in the play, which marked its first entry into the North American unconventional shales. Southwestern would use proceeds from the divestiture of the Fayetteville assets to reduce debt, supplement Appalachia development capital and potentially to return capital to shareholders, the company said in a statement.

The company's plans to divest its Fayetteville assets is part of "a series of strategic actions that began in early 2016 to reposition our company to compete and win in the future," President and CEO Bill Way said in the statement.

Way described the Fayetteville holdings as "a large-scale, low-decline, cash flow generating asset with identified, low-risk future development opportunities."

Southwestern was among the first E&P companies to begin development in the play, entering the Fayetteville in the early years of the 21st century. However in recent years, the Fayetteville has taken a back seat to the company's development of its Appalachian Basin assets northeastern Pennsylvania and in West Virginia.

In a report on its 2017 operational results, which the company also released on Thursday, Southwestern said it saw net production of 897 Bcf of gas equivalent (2.46 Bcfe/d), including 578 Bcfe, (1.58 Bcfe/d) from the Appalachian Basin and only 316 Bcf, (866 MMcfe/d) from the Fayetteville Shale.

The producer reported it achieved a record Appalachian Basin gross operated exit production rate of 2.35 Bcfe/d, a 40% increase compared with end of December 2016. APPALACHIAN BASIN WAS 75% OF PROVED RESERVES YEAR-END 2017

The Appalachian Basin accounted for 75% of Southwestern's proved reserves at the end of 2017. The company reported preliminary total proved reserves of approximately 14.8 Tcfe, including 11.1 Tcfe from the Appalachian Basin. Southwestern's preliminary total proved reserves rose by 181%, while its Appalachian total proved reserves increased by 393%, compared with 2016 totals.

Analysts who follow Southwestern had long suspected that it might sell noncore assets to focus on developing its Appalachian Basin properties, particularly its West Virginia assets in the southwestern part of the basin. "An asset sale of some kind was expected," Guggenheim Securities analyst Subash Chandra said in an interview Thursday. "This is the one that was just sort of sticking out there. People have been talking about them wanting to sell this for a long time." In recent years, producers have been moving away from dry gas plays, such as the Fayetteville Shale, in favor of plays where the gas has a higher liquids content, and therefore better economic returns, such as in portions of the Utica and Marcellus shales. Southwestern, for example, reported that its 2017 production was composed of 89% gas and 11% natural gas liquids and condensate.

However, there is still a healthy market for dry gas assets like the Fayetteville, particularly among smaller private equity-funded producers, Chandra said.

"We've seen a lot of dry gas transactions out there and the product has moved," he said. "There's a lot of private equity money out there and there are a lot of private equity companies being born every minute." COMPANY PREVIOUSLY RENEGOTIATED LONG-HAUL TRANSPORTATION FEES

Chandra noted that Southwestern recently announced it had renegotiated its long-haul transportation agreements in the Fayetteville "to where they get a little more breathing room on the Fayetteville economics."

In an interview with Platts last month, Way said with the renegotiation of those agreements, Southwestern reduced its exposure to unused demand fees in the near term and unlocked reduced transportation fees in the longer term.

"We've reduced the long-haul transportation rate for 2021 to 2030 by approximately 26 cents/Mcf taking that cost to 10 cents to get to the Gulf, a terrific rate," he said.

In a note to investors, Guggenheim analysts said proceeds from the sale of Southwestern's combined E&P and midstream assets in the Fayetteville Shale and associated midstream "could top $2 [billion], which is significant for a company with $3.8 [billion] of net debt."

Mizuho Securities analyst Timothy Rezvan said the planned sale by Southwestern of its Fayetteville assets was "no surprise, given inferior drilling economics and a declining production profile." The company's total Fayetteville production was down 13% in the last year, and down 38% from its peak in the third quarter of 2014, he said in a report to investors on Thursday.

"The declining volume is likely to impact the value from the associated gathering system, which we believe may have to be given away for free, given the tough environment to sell gassy assets," Rezvan wrote. With Chesapeake Energy and BHP Billiton both having recently announced plans to sell assets, "there is no shortage of large gassy assets on the market," he said.

In his Platts interview Way said the company's legacy Fayetteville Shale assets could continue to "compete for capital as we allocate capital to the highest return projects."

He said the company last year continued to drill wells in the region, in large part to expand its understanding of the potential 115,000-acre Moorefield interval in the Fayetteville play, "which appears to have better economics than the Fayetteville," itself. -- Jim Magill,

-- Edited by Joe Fisher,

Copyright © 2018 S&P Global Platts, a division of S&P Global. All rights reserved.