Shale Consolidation: Chesapeake Makes $2.2-Billion Buy in Gas-Rich Haynesville

Just as US natural gas prices reach multiyear highs, Chesapeake Energy moves to become this region's largest producer.

Source: Getty Images.

Oklahoma City-based Chesapeake Energy said today its is buying fellow gas producer Vine Energy in a deal valued at $2.2 billion.

Chesapeake said the acquisition will make it the largest producer in the Haynesville Shale with an average production of about 1.6 Bcf/D. The operator will finance the transaction using 8% cash and 92% in stock.

The deal comes as US natural gas prices (NYMEX) enjoy multiyear high prices of around $4.00/MMBtu and about 2 months afterSouthwestern Energy's acquisition of another Haynesville operator, Indigo Natural Resources, for $2.7 billion in a stock-and-cash deal.The North American shale sector has been on a steady drive to consolidate and return more value to shareholders since oil prices crashed more than a year ago.

Chesapeake noted in its announcement that Vine’s assets represent almost 370 drilling locations with a 50% rate of return at $2.50 NYMEX gas price. On a pro forma basis, Chesapeake’s portfolio in the gas-rich Haynesville will swell from 225,000 acres to around 348,000 acres with a total of 1,500 future drilling locations.

Vine shareholders are set to receive around 0.248 shares of Chesapeake stock along with $1.20 in cash for each Vine share. On closing, expected to come in the fourth quarter, Chesapeake shareholders will own 86% of the combined company with Vine shareholders owning the remaining 14%.

Based in Plano, Texas, Vine is a pureplay natural gas explorer with Haynesville and Mid-Bossier Shale assets in northern Louisiana. Vine was formed earlier this year through the combination of three private-equity-backed operators: Vine Oil & Gas, Brix Oil & Gas Holdings, and Harvest Royalties. The company reports a current production rate of around 1 Bcf/D on its website.

“The move today adds Chesapeake to the list of companies taking a ‘basin dominance’ growth strategy. Others include Pioneer and EQT. And this is the kind of deal investors can support with confidence. The cost savings are more clearly understood," analysts from Wood Mackenzie said following the deal's announcement.

Chesapeake said by consolidating it will drive cash flow up by nearly $1.5 billion over the next 5 years while delivering an annual operating savings of $50 million. Chesapeake will also take on more than $1 billion in debt from Vine, which will bring its total debt load to more than $1.7 million.

Chesapeake filed for bankruptcy last year to restructure $9.1 billion in debt. It emerged from the bankruptcy process in February and soon after parted ways with its CEO Doug Lawler and other executives.

Chesapeake’s Interim CEO Mike Wichterich, who assumed Lawler’s post in April, said consolidating the Haynesville region will see the company “become the dominate supplier of responsibly sourced gas to premium markets in the Gulf Coast and abroad.”

The Haynesville is advantageously located just to the north of several liquified natural gas trains that have made the US one of the world's top gas exporters.

Earlier this year, Chesapeake announced it was working with a technology partner to certify efforts to mitigate emissions at its production sites in order to market what operators are calling responsibly sourced gas.