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Masked by $4B deal, institutions sold shale gas stocks in Q1'19

Chesapeake Energy Corp. got a slew of new shareholders from the private equity world after its nearly $4 billion merger with WildHorse Resource Development Corp. on Feb. 1, but whether those shareholders stick around for the long term is an unanswered question.

The company's newest and largest shareholder is Fifth Creek Energy Co. LLC, a subsidiary and majority stockholder in Rocky Mountain oil and gas producer HighPoint Resources Corp. Joining Fifth Creek as Chesapeake owners are private equity funds NGP Energy Capital Management LLC and the Carlyle Group LP. Fifth Creek, Carlyle and NGP Energy were three of the Oklahoma driller's four top shareholders at the end of the first quarter, according to Form 13F filings. All three were big shareholders in WildHorse, and all three got 5.3 Chesapeake shares for each WildHorse share they held and $3 per share in cash, or 6 Chesapeake shares and no cash, depending on which they elected.

NGP Energy and its affiliates have already begun selling some of their Chesapeake shares and have plans to sell more, according to SEC filings. Carlyle and Fifth Creek have not filed any changes in their holdings.

The WildHorse purchase marked another step in Chesapeake's move toward shale oil in Texas and the Rockies and away from the shale gas business it once led in the U.S. "Oil growth is a core strategy," Guggenheim Securities LLC analyst Subash Chandra told clients in April. Chandra noted that sales of some of Chesapeake's huge gas assets, such as those in Ohio's Utica, got the producer out from under costly processing and pipeline commitments.

Chandra liked the "offensive" move to oil production growth. "Other levered names prioritize free cash flow as the path towards de-levering, but we believe equity investors will recoil from those in 'blow-down' mode. We believe the optimal model is 'growth & income,' where free cash flows are rewarded once a company has at least replaced depletion."

Many Chesapeake shareholders have seen enough "offense" and are edging out the door. Since the merger's close, Chesapeake shares are down 29% to under $2 per share on heavier-than-normal daily trading volumes through a May 24 market close before the Memorial Day weekend.

If some of the newest and largest Chesapeake shareholders are selling, it would be in line with most other institutional investors in the shale gas sector in the first quarter. Leaving aside Chesapeake Energy's 607 million-share surge of shareholders from WildHorse, institutional investors were net sellers of the sector in the quarter. They reduced their holdings by a net 30.7 million shares, with the biggest reductions in institutional holdings at sector pillars EQT Corp. and Cabot Oil & Gas Corp.

With a bearish outlook for natural gas commodity prices over the next few years, analysts at energy investment bank Tudor Pickering Holt & Co. said stock prices will be capped unless drillers cut back on production and tighten the supply-demand balance. More mediocre performance by a group of stocks that are already cheap could spark mergers to consolidate the sector. EQT and Cabot have the strongest balance sheets with which to buy another shale gas producer, TPH told clients May 20.

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