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Chesapeake sells its SW Marcellus shale gas position to Southwestern for $5.375 bil


Southwestern Energy's CEO on Thursday said the company's $5.375 billion purchase of 413,000 acres of Chesapeake Energy's southwest Marcellus and Utica shale gas leases and wells would be profitable, even as Wall Street investors expressed displeasure at the company's move.

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CEO Steve Mueller rationalized the deal by saying he expects natural gas to keep trading around $4/Mcf, but "the market is missing some of the signals" that future demand will be robust.

Either way, "at 3.50/Mcf forever, we still get good returns," Mueller said on a conference call with analysts following the deal's announcement Thursday.

The Houston-based pioneer of Arkansas Fayetteville Shale, Southwestern has made a name for itself as a low-cost producer.

In its most recent second quarter report, it reported it spent $2.33/Mcf for wells that produce $3.98/Mcf gas after hedging for a 71% internal rate of return.

For the remainder of the year, Southwestern gas said it has 61% of its gas production hedges at $4.35/Mcf.

However, while investors liked Chesapeake Energy's sale, they were not pleased with the buyer.

Share prices for the two companies shot off in different directions Thursday, with Oklahoma City-based Chesapeake's shares gaining 14% to 20.23/share in midday trading, while Southwestern's stock price dropped 9% to $32.74, hitting a 52-week low.

Southwestern is buying 413,000 acres, in West Virginia and Washington County, Pennsylvania, with roughly 1,500 wells, of which 435 are shale, the companies said.

Current production from the properties is 184,000 Mcf/d of natural gas, 20,000 b/d of natural gas liquids, and 5,000 b/d of condensate.

The sale leaves Chesapeake, once the leading leaseholder in the Marcellus with 1.5 million acres, with 230,000 acres of leasehold, mostly in northeastern Pennsylvania.

"Qualitatively not surprised by either side," analysts at Houston energy investment bank Tudor Pickering Holt said in a Thursday note to clients. "Chesapeake monetization somewhat expected and the feeling was Southwestern needed next leg."

TPH said the deal values the undeveloped leases at $8,000-$9,000/acre, which is about one-third less than prevailing prices for wet gas leases in the Marcellus and Utica.

Standard & Poor's Ratings Direct said Chesapeake would get its BB-plus credit rating bumped up if it used the proceeds to pay down its debt.

S&P, like Platts, is a McGraw Hill Financial company.

--Bill Holland,
--Edited by Derek Sands,