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Southwestern Energy to sell Fayetteville Shale assets in Arkansas

Southwestern Energy Thursday said it plans to put its legacy FayettevilleShale assets in Arkansas up for sale. Upstream and midstream assets therecould fetch proceeds of $2 billion, one analyst said.

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The Houston-based producer will "actively pursue strategic alternatives"for its exploration-and-production and the midstream gathering assets inthe play, which marked its first entry into the North Americanunconventional shales. Southwestern would use proceeds from thedivestiture of the Fayetteville assets to reduce debt, supplementAppalachia development capital and potentially to return capital toshareholders, the company said in a statement.

The company's plans to divest its Fayetteville assets is part of "aseries of strategic actions that began in early 2016 to reposition ourcompany to compete and win in the future," President and CEO Bill Waysaid in the statement.

Way described the Fayetteville holdings as "a large-scale, low-decline,cash flow generating asset with identified, low-risk future developmentopportunities."

Southwestern was among the first E&P companies to begin development inthe play, entering the Fayetteville in the early years of the 21stcentury. However in recent years, the Fayetteville has taken a back seatto the company's development of its Appalachian Basin assets northeasternPennsylvania and in West Virginia.

In a report on its 2017 operational results, which the company alsoreleased on Thursday, Southwestern said it saw net production of 897 Bcfof gas equivalent (2.46 Bcfe/d), including 578 Bcfe, (1.58 Bcfe/d) fromthe Appalachian Basin and only 316 Bcf, (866 MMcfe/d) from theFayetteville Shale.

The producer reported it achieved a record Appalachian Basin grossoperated exit production rate of 2.35 Bcfe/d, a 40% increase comparedwith end of December 2016. APPALACHIAN BASIN WAS 75% OF PROVED RESERVES YEAR-END 2017

The Appalachian Basin accounted for 75% of Southwestern's proved reservesat the end of 2017. The company reported preliminary total provedreserves of approximately 14.8 Tcfe, including 11.1 Tcfe from theAppalachian Basin. Southwestern's preliminary total proved reserves roseby 181%, while its Appalachian total proved reserves increased by 393%,compared with 2016 totals.

Analysts who follow Southwestern had long suspected that it might sellnoncore assets to focus on developing its Appalachian Basin properties,particularly its West Virginia assets in the southwestern part of thebasin. "An asset sale of some kind was expected," Guggenheim Securitiesanalyst Subash Chandra said in an interview Thursday. "This is the onethat was just sort of sticking out there. People have been talking aboutthem wanting to sell this for a long time." In recent years, producers have been moving away from dry gas plays, suchas the Fayetteville Shale, in favor of plays where the gas has a higherliquids content, and therefore better economic returns, such as inportions of the Utica and Marcellus shales. Southwestern, for example,reported that its 2017 production was composed of 89% gas and 11% naturalgas liquids and condensate.

However, there is still a healthy market for dry gas assets like theFayetteville, particularly among smaller private equity-funded producers,Chandra said.

"We've seen a lot of dry gas transactions out there and the product hasmoved," he said. "There's a lot of private equity money out there andthere are a lot of private equity companies being born every minute." COMPANY PREVIOUSLY RENEGOTIATED LONG-HAUL TRANSPORTATION FEES

Chandra noted that Southwestern recently announced it had renegotiatedits long-haul transportation agreements in the Fayetteville "to wherethey get a little more breathing room on the Fayetteville economics."

In an interview with Platts last month, Way said with the renegotiationof those agreements, Southwestern reduced its exposure to unused demandfees in the near term and unlocked reduced transportation fees in thelonger term.

"We've reduced the long-haul transportation rate for 2021 to 2030 byapproximately 26 cents/Mcf taking that cost to 10 cents to get to theGulf, a terrific rate," he said.

In a note to investors, Guggenheim analysts said proceeds from the saleof Southwestern's combined E&P and midstream assets in the FayettevilleShale and associated midstream "could top $2 [billion], which issignificant for a company with $3.8 [billion] of net debt."

Mizuho Securities analyst Timothy Rezvan said the planned sale bySouthwestern of its Fayetteville assets was "no surprise, given inferiordrilling economics and a declining production profile." The company'stotal Fayetteville production was down 13% in the last year, and down 38%from its peak in the third quarter of 2014, he said in a report toinvestors on Thursday.

"The declining volume is likely to impact the value from the associatedgathering system, which we believe may have to be given away for free,given the tough environment to sell gassy assets," Rezvan wrote. WithChesapeake Energy and BHP Billiton both having recently announced plansto sell assets, "there is no shortage of large gassy assets on themarket," he said.

In his Platts interview Way said the company's legacy Fayetteville Shaleassets could continue to "compete for capital as we allocate capital tothe highest return projects."

He said the company last year continued to drill wells in the region, inlarge part to expand its understanding of the potential 115,000-acreMoorefield interval in the Fayetteville play, "which appears to havebetter economics than the Fayetteville," itself. -- Jim Magill, jim.magill@spglobal.com

-- Edited by Joe Fisher, newsdesk@spglobal.com