US Gas: Southwestern Boosts Haynesville Position in $1.85-Billion Buy
Already the largest producer in the gas-rich play, Southwestern has bolstered its status with the acquisition of the third-largest producer.
Making its second big purchase this year, Southwestern Energy announced today that it is acquiring fellow gas producer GEP Haynesville for a price near $1.85 billion. Southwestern is the largest producer in the Haynesville Shale of northern Louisiana, and in buying the gas-rich region's third-largest producer it will boost its overall output to about 4.7 Bcf/D, on a pro forma basis.
“This strategic move positions Southwestern as the largest producer in the Haynesville and enhances our leading presence in the top two premier natural gas basins in the US,” Bill Way, Southwestern president and CEO, said in a statement on the combination of the two Houston-area based companies.
The private-equity-backed GEP is a joint venture of GeoSouthern Haynesville with an asset portfolio that accounts for 700 MMcf/D in production and 700 drilling locations. Its purchase price comprises about $1.32 billion in cash and $525 million Southwestern shares based on current stock value. Southwestern plans to realize an immediate annual savings of $25 million by consolidating operations and personnel.
The transaction for the unspecified acreage sits atop the Haynesville and Middle Bossier formations which are located only about 200 miles inland from many of the liquified natural gas (LNG) export facilities along the US Gulf Coast. That includes Cheniere’s Sabine Pass LNG facility, which with its 4.7 Bcf/D processing capacity is the largest in the country. Southwestern said it expects these LNG facilities to represent about 65% of its takeaway market.
Thanks to the rise of US LNG, the Haynesville has seen a nearly 300% uptick in rigs over the past 5 years to a total of 46—making it the third-most active shale play in the US. And with natural gas prices now hitting multiyear highs domestically and internationally, it has also become a hotbed for big acquisitions.
In June, Southwestern moved into the Haynesville region after buying Indigo Natural Resources and its 149,000 acres of Haynesville leases in a deal valued at $2.7 billion. That decision followed a 2020 merger between Southwestern and Appalachian Basin producer Montage Resources in an all-stock deal that was valued at around $204 million.
Southwestern will take on debt to finance the GEP deal but was upbeat on its ability to improve its balance sheets as it expects a 2022 free cash flow of approximately $1 billion based on a $4/Mcf gas price and $67/bbl crude price.
US gas broke the $5/Mcf handle this month and US crude futures are trading above $80/bbl; both representing prices not seen since 2014. The price rally, unforeseen by many energy producers, is not being fully realized by GEP, which Southwestern noted in its announcement remains locked into an average hedge position of $2.89/Mcf for 35% of its production until the end of 2022.
After 2022, GEP is unhedged, which Southwestern said will open the potential to “protect returns and cash flow well above valuation prices.”
Southwestern’s latest attempt to consolidate the Haynesville region comes days after one of its chief rivals, Oklahoma City-based Chesapeake Energy, closed its $2.2-billion acquisition of privately held Vine Energy that was announced in August.