Southwestern Energy to put Fayetteville Shale assets on the auction block

Nearly two years after laying off hundreds of employees and halting its drilling program in Arkansas, Houston-based Southwestern Energy announced Thursday (Feb. 8) it will put its Fayetteville Shale assets on the auction block as the U.S. energy industry pivots to “liquids rich” shale plays that produce oil and gas.

In announcing a fiscal 2018 budget of up to $1.25 billion, Southwestern Energy officials said the Houston independent oil and gas giant intends to “actively pursue strategic alternatives” for the Fayetteville Shale exploration and production operations and related midstream gathering assets along with other initiatives.

“Fayetteville is a large-scale, low decline, cash flow generating asset with identified, low-risk future development opportunities and a world-class operating team,” Southwestern Energy President and CEO Bill Way said in a statement. “The future success of Southwestern Energy will always be underpinned by the legacy of our Fayetteville asset and our employees who will continue to build on that foundation.”

Although the announcement is not surprising given that Southwestern Energy and other oil and gas firms have largely halted exploration and drilling activities in the Fayetteville Shale play over the past two years, Way said six months ago the company planned to one day-reinvest in the declining Arkansas natural gas development. Way said in early August the overall corporate strategy is to allocate capital based on economics. To do that in the Arkansas play, the company’s goal was to unlock additional value by lowering operating costs. That included improving drilling, natural gas flow and water handling techniques, as well as renegotiating transport agreements that will allow the company to hit its near-term financial targets, said the Southwestern CEO.

‘DE-RISKING’ AND BUILDING VALUE
In reversing course, Way said the Fayetteville Shale review resulted from a deliberate and methodical process, including a comprehensive review of the company’s portfolio by the board of directors and senior management. He said the next phase of Southwestern Energy’s strategy is to drive greater shareholder value and build on the strategic actions taken over the past two years to stabilize its financial structure, improve margins and optimize its current assets.

“These announced initiatives continue a series of strategic actions that began in early 2016 to reposition our company to compete and win in the future,” Way said. “Our teams have done a tremendous job in de-risking and enhancing the value of our portfolio. Our Appalachia assets produce industry-leading returns, with a growing, higher value liquids component, and will soon be capable to self-fund future growth. We are now in a position to further advance our opportunities in Appalachia, to deliver sustainable, value-driven growth and greater returns for our shareholders, all while maintaining our disciplined capital investing commitment.”

Once the nation’s third largest shale play, the unconventional Arkansas natural gas development has been on the decline since 2010 as the number of rigs and active drilling programs ended in 2016. At its peak with the emergence of new tracking techniques, a study by the University of Arkansas showed that Southwestern and other U.S. oil and gas companies like Chesapeake Energy and ExxonMobil’s XTO Energy had spent more than $13 billion and hired thousands of high-paid workers in the Arkansas play between 2004 and 2009.

Beside’s Southwestern’s decision this week, Australia’s BHP Billiton announced Jan. 17 it also plans to move forward with an exit strategy to divest its U.S. onshore operations, which includes the Fayetteville Shale assets first purchased for nearly $5 billion seven years ago.

In fiscal 2016, BHP’s investment in the Arkansas play totaled $49 million, producing some $95 million in earnings on revenue of $246 million. As of Feb. 8, BHP’s leasehold position of 487,000 net acres with an average operating stake of 58% still makes the Australian company the third-largest Fayetteville Shale operator behind Southwestern and XTO.

According to recent calculations by Bloomberg, more than $7 billion in market value has been wiped out so far this year for the eight biggest U.S. gas producers that don’t also pump significant amounts of crude. Among the hardest hit have been Southwestern Energy, Gulfport Energy Corp. and Range Resources Corp., which have declined to the tune of 33%, 30% and 25%, respectively, since the end of 2017, the report said.