Southwestern’s Arkansas shale assets worth $2 billion, Wall Street analyst says

Southwestern Energy spokeswoman Christina Fowler said the Houston-based oil and gas firm will offer more details in its upcoming fourth quarter and annual financial report of its Feb. 8 announcement to put its upstream and midstream Fayetteville Shale assets on the auction block.

In announcing a fiscal 2018 budget of up to $1.25 billion, Southwestern officials said the Fayetteville Shale leader intends to “actively pursue strategic alternatives” for the Arkansas shale play’s 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 assets and our employees who will continue to build on that foundation.”

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.

During peak production around 2007, the Fayetteville Shale supported total economic output of $2.6 billion and direct and indirect employment of nearly 10,000 workers, according to the study by the University Arkansas. In late 2016, Southwestern cut nearly 600 workers in Arkansas, down from a total of 1,500 as recently as 2015.

In seeking to exit the Arkansas shale play, Southwestern said it plans to shift most of its capital investment and workers to the company’s Appalachian Basin operations in southwestern Pennsylvania, northern West Virginia and eastern Ohio. The Houston-based oil and gas giant, which traces its roots back to Fayetteville-based Arkansas Western Gas Co., has an estimated 500 employees in Arkansas.

“We’ve had some relocation to support drilling and completion activities in West Virginia and Pennsylvania,” Fowler said of recent moves.

Concerning the divesting of its Fayetteville Shale assets, Southwestern officials have not given a timetable on a possible sale. Way said the steps to reposition the company’s operations resulted from a deliberate and methodical process, including a comprehensive review by the independent oil and gas firm’s board of directors and senior management team.

In a research note following Southwestern’s Fayetteville Shale exit strategy, Wall Street oil and gas analyst Subash Chandra said the Fayetteville Shale leader will gain a new “lease on life with plans to sell the Fayetteville Shale and associated midstream.”

“By our estimates, combined sales proceeds could top $2 billion, which is significant for a company with $3.8 billion of net debt,” said Chandra, managing director and senior oil and gas analyst at New York City-based Guggenheim Securities.

Chandra said the prolonged period of lower oil and gas prices has been detrimental to Southwestern’s growth and asset values, not that the company may be “co-dependent” on possibly narrowing buyers to those with midstream assets such as pipelines and storage facilities.

“We expect the buyer of the upstream and midstream assets will have to be either affiliated companies or the same company because of the co-decency of the assets,” he said. “There have not been many sales, recent or dated, in the Fayetteville Basin. BHP will have assets for sale this year as well, which could make the combined assets appealing for an entity wanting to dominate a gas basin.”

As the largest operator in the Fayetteville Shale, Southwestern still owns 919,000 net acres in the natural gas shale play with nearly 4,000 operating wells across several counties in north-central Arkansas. Southwestern and BHP are also actively seeking premium offers for the Moorefield Shale, a smaller, less-developed play in White County that has drawn interest for its future potential production.