Fresh out of bankruptcy, Chesapeake pursues $2.2B Haynesville acquisition

Chesapeake Energy Corp.'s $2.2 billion deal to acquire Haynesville Shale neighbor Vine Energy Inc. continues the trend of shale gas producers using low-cost deals to roll up leases inside their basins. The transaction would add more than $1 billion in debt to Chesapeake, which recently emerged from bankruptcy.

"We're not going to break our balance sheet. We are not the Chesapeake of the past," interim CEO and Chairman Michael Wichterich said, trying to reassure analysts on a conference call to discuss the Vine deal and the second quarter's results. Chesapeake, which pioneered the Haynesville Shale of Louisiana and Texas in 2008, has a corporate history of piling on debt to close another deal.

Chesapeake will buy the Blackstone Inc.-controlled Vine for $15 per share, 92% of which will be Chesapeake stock, and will assume $1.1 billion of Vine's debt in a deal expected to close in the fourth quarter. Through the deal, Chesapeake will become the Haynesville's largest producer, with 1.58 Bcf/d of gas produced just north of the Gulf Coast's LNG and petrochemical complex.

Vine's operations will immediately add volumes and cash flow to Chesapeake, the company said, while a $50 million savings from eliminating duplication in the two companies will allow it to hike its fixed dividend payments to shareholders by 27% in the first quarter of 2022, from $1.375 per share yearly to $1.75 per share in 2022. Chesapeake said it plans to use a fixed plus variable dividend arrangement to return 50% of free cash flows to shareholders in 2022.

"The synergies that we're talking about, we're going to give to the shareholders," Wichterich told analysts. "We're going to raise our fixed dividend by 27%. We think it's the right thing to do, and we're happy to do it."

Andrew Dittmar, a senior M&A analyst with energy data and service firm Enverus, expects the deal structure to align with the market's priorities.

"This deal is a return to 2020's model that investors seemed mostly to applaud," Dittmar said. "The deal is a zero-premium merger between two public companies that operate in the same basin, bringing economies of scale and operational efficiencies to the table in addition to the usual general and administrative savings."

Enverus said the need for size and scale will continue to fuel mergers. "Investors continue to push for consolidation and additional scale in their [exploration and production] investments, with the size threshold for maintaining interest seemingly continually moving upward," Enverus told its clients. "Investors can also be choosy in what deals they support with a modest price take, operational and general and administrative synergies, and supporting additional free cash flow all on the checklist."

For 2022, Chesapeake expects oil production to decline slightly to 21 million barrels, while its natural gas production will climb 46% to more than 1.1 Tcf with the addition of Vine.

Wichterich said the return at current oil prices was too good for the shale driller to ignore. "The rate of return opportunity for us is very attractive, and we have production that's in decline," Wichterich said. "There's no reason we shouldn't be drilling our absolute best locations in South Texas, bringing on a few wells in our other areas that are also a great rate of return, and stemming that decline in a way that is very accretive to cash flow year over year."

Chesapeake's second-quarter results, released late Aug. 10, beat analysts' expectations, according to a consensus compiled by S&P Capital IQ. Chesapeake reported adjusted earnings of $181 million, or $1.64 per share, well above the $1.18 per share Wall Street expected. Chesapeake said it generated $292 million in free cash flow during the quarter.

Chesapeake's second-quarter results are not comparable to the same period of 2020 because of the bankruptcy reorganization.

On a GAAP basis, Chesapeake reported a $439 million loss, largely due to a $617 million noncash charge because of a loss in value for its hedging portfolio.

In the second quarter, Chesapeake reported producing 2 Bcf/d of natural gas, more than half of that in the Marcellus Shale of Pennsylvania, at an average realized price of $2.17/Mcf. The company's crude oil operations in Texas and Wyoming produced 74,000 barrels per day, selling for $65.41 per barrel.