Southwestern Energy announces $2.4 billion Fayetteville Shale ‘exit deal’ with Oklahoma driller

After nearly two decades as the so-called Fayetteville Shale leader, Southwestern Energy Co. has found an exit door.

The Houston-based oil and gas company, which marked the beginning of the Fayetteville Shale era with a $11 million leasehold purchase in 2003, announced Tuesday (Sept. 4) that it has reached a definitive agreement for Oklahoma City-based Flywheel Energy LLC to purchase its natural gas assets in the Arkansas shale play in a cash-and-debt deal worth nearly $2.4 billion.

“The sale of Fayetteville represents a pivotal and deliberate step towards fulfilling our promise to reposition Southwestern Energy to capture greater returns from our higher margin Appalachia assets,” said Southwestern President and CEO Bill Way. “We are pleased with the process, the outcome and the resulting valuation of this significant asset. I’d like to thank the employees of Fayetteville for their years of extraordinary service to the company and its shareholders, particularly during this process.”

Under the terms of the deal, Southwestern will sell its Fayetteville Shale exploration and production operations and related midstream gathering assets for $1.865 billion in cash, subject to adjustments and customary closing conditions. In addition, Flywheel will assume approximately $438 million of future contractual liabilities after considering certain obligations retained by the company, officials said.

Southwestern officials said the pact with the Oklahoma City-based exploration and production company has already been unanimously approved by the company’s board of directors with an effective date of July 1, 2018. The deal is expected to close in December 2018, at which time Southwestern will turn over the keys to the Arkansas shale play that has been closely tied to the company’s prominence and profitable Wall Street run-up in the early 2000s.

As of today, Southwestern’s assets in the unconventional Arkansas natural gas development includes 716 million net cubic feet (mmcf/d) of natural gas net production from 4,033 producing wells across over 915,000 net acres. The Texas oil and gas driller also owns an integrated midstream gathering system with over 2,000 miles of gathering pipelines and more than 50 compressor stations, all located in central Arkansas.

Southwestern has been totally silent concerning its Fayetteville Shale auction since the Houston-based independent oil and gas company first announced in the first quarter that it planned to hire Wall Street banking and investment conglomerate JPMorgan to evaluate “strategic alternatives” and begin a process to get the most value out of the Arkansas natural gas development.

The buyer, Flywheel Energy, is a relatively new player in the U.S. oil and gas industry that is being rejuvenated with new investment and interest on the strength of rising international crude prices. Flywheel officials were not immediately available for comment for this story, but the company’s website now styles the Oklahoma oil company as “operator of the largest position in the Fayetteville Shale,” although the deal is not expected to close until the end of the year.

“Flywheel Energy is proud to join the Arkansas community as an operator in the historic Fayetteville Shale,” said Flywheel CEO Justin Cope. “We believe this is another great step as we work to execute our long term strategy and achieve superior risk-adjusted returns for our investors. The Fayetteville Shale has played a prominent role in the American shale revolution. We look forward to being a part of its next chapter and to providing affordable energy to the U.S. gas market for decades to come.”

According to details of its financing arrangement to purchase the Fayetteville Shale assets, Flywheel said it closed an equity backing of $700 million from the Los Angeles-based Kayne (Anderson) Private Energy Income Funds platform and members of Flywheel’s management team.

The Oklahoma oil and gas driller first got its start as Valorem Energy in early 2017 with backing from the same Kayne Anderson fund that manages over $29 billion in assets globally. Only months after its start as a company, Valorem acquired interests in the Williston Basin in North Dakota for $285 million. Then in August 2018, Kayne Anderson committed another $700 million of equity to the management team of the newly-formed Flywheel Energy.

Danny Weingeist, managing partner of the Kayne Private Energy Income Funds, said the West Coast investment group was “thrilled to be partnering with the Flywheel team once again” to acquire these long-life natural gas assets in the Fayetteville Shale.

“Southwestern’s Fayetteville assets are an ideal fit for (Kayne Anderson’s) strategy, generating significant free cash flow through low-risk, legacy natural gas production,” Weingeist said of the investment firm’s energy private equity fund, which has raised over $8 billion since 1998.

Besides Flywheel’s and Kayne Anderson’s financial stake in the Fayetteville Shale deal, Wells Fargo Bank, and Citibank underwrote the debt financing portion of the deal. Once the deal closes, Flywheel officials said the Oklahoma City energy partnership will have made over $2.1 billion of acquisitions since 2017.

“We believe having a high quality team is critical to our company’s future success and we are honored to join an organization with an exceptional track record of safe and reliable operations,” said Cope. “We look forward to working with this experienced operations team to continue the Fayetteville legacy.”

In a separate but related transaction, Southwestern said it plans to buy up to $900 million of its outstanding senior notes, as well as commencing a stock buyback program of up to $200 million for Southwestern’s outstanding shares. The former Arkansas-based oil company also said it plans to allocate up to $600 million over the next two years to supplement cash flow to further develop its liquids-rich Appalachia shale assets.

“This transaction is a significant milestone in advancing our strategic plan. Our shareholders will benefit from an optimized portfolio, stronger balance sheet including improved financial flexibility and the return of capital to all shareholders through a share repurchase program,” said Way.

Following the close of the Flywheel deal, Southwestern said it will have nearly $2.3 billion of debt. Proceeds from the sale will be used to replace cash flow that would otherwise have been generated by the Fayetteville assets and reinvest into the company’s shale assets in West Virginia, which is expected to be profitable by 2020.

J.P. Morgan Securities is serving as financial advisor to Southwestern Energy, and Latham & Watkins LLP is serving as legal advisor. Wells Fargo Securities LLC served as financial and technical advisor to Flywheel, while Vinson & Elkins LLP is providing legal counsel.

Southwestern is the second Fayetteville Shale operator to exit the Arkansas shale play in recent weeks. In late July, Australian mining giant BHP Billiton announced a limited liability partnership owned by Dallas-based Merit Energy Company had acquired the company’s Fayetteville Shale assets for an asking price of $300 million.

Like Flywheel, Dallas-based Merit Energy is a privately-held company with a short track-record in the oil and gas industry. That deal is expected to close by the end of October.