Chesapeake's Vine Buy Could Draw More E&Ps Into Haynesville

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Invigorated by a debt-slashing bankruptcy restructuring, Chesapeake Energy has staked a claim as the key consolidator in the Haynesville Shale, snatching up Vine Energy in a cash and stock deal valued at $2.2 billion. The move could lead to more Appalachian producers wanting to move into the Haynesville, as Southwestern Energy did with its recent $2.7 billion Indigo buyout, Enverus M&A analyst Andrew Dittmar told Energy Intelligence (NGW Jun.7'21). And in the competition for reasoned growth, it only makes sense that Appalachian producers would want gas exposure to a different pricing point with different differentials. “This acquisition puts Chesapeake into the driver's seat as a lead consolidator in the Haynesville,” Dittmar said. “Vine was one of the most attractive acquisition targets available in the gas space both from an inventory depth and quality perspective and based on valuation assuming they could be bought at their market price, which they were.” The Marcellus/Utica Shale in Appalachia and the Haynesville straddling the border of North Louisiana and East Texas are both seeing the beginnings of a major consolidation that will eventually leave a handful of large E&Ps dominating each play. “That way they can shift capex in the future should price realizations in Appalachia not be where they want them to be," Dittmar said. “For big companies like EQT and Range Resources that are primarily Appalachia guys, it might make sense for them to move into the Haynesville, as well.” Chesapeake already had major gas assets in both plays when it emerged from bankruptcy in February (NGW Feb.15'21). But this latest move firmly positions it as one of the dominant Haynesville E&Ps, with 348,000 net acres producing 1.5 billion cubic feet of gas per day. It also pushes Chesapeake higher into the top tier of US gas producers, with expected 2022 gas output of 3.04 Bcf/d, up more than 45% before the Vine acquisition. Haynesville vs. Marcellus But for all the technical details, the bottom line is "Chesapeake favors the Haynesville over the Marcellus for expansion likely based on available targets and a better outlook for future gas pricing,” Dittmar said. It also comes as little surprise to fellow Haynesville players, who say the merger is certainly in Chesapeake’s “wheelhouse” and positions it well for long-term growth. “The fact that Chesapeake is emerging as a likely major consolidator in the Haynesville when it also operates in Appalachia, speaks to the Haynesville’s marketing advantages and ability to continue to grow in that area,” one Haynesville producer CEO told Energy Intelligence. “Appalachia has a relatively fixed amount of takeaway capacity and therefore, does not offer the same optionality that the Haynesville offers,” he said. "I think this was a good move by Chesapeake," another Haynesville CEO said. "The Vine acreage is very complementary to the Chesapeake acreage and will result in many more cross-unit laterals." However, he did flag one possible pitfall. "Chesapeake may be a consolidator in the Haynesville, but they need to be careful and not get themselves over-levered, as was the case before." Overreach Deja Vu? A key reason the Oklahoma-based company went bankrupt in 2020 was the debt burden it acquired aggressively snatching up assets in the early shale boom before the oil and gas market went bust a few years later (NGW Jul.6'20). Former CEO Doug Lawyer spent eight years divesting assets and paying down debt before the company sought bankruptcy protection last year. But it had leaned up enough to emerge from Chapter 11 in February with its debt under control and focused on its prime gas assets in Louisiana and Appalachia. Nonetheless, some analysts were puzzled that Chesapeake’s interim CEO, Mike Wichterich, who replaced Lawler in April, would spearhead a major merger so soon, although Wichterich made clear in last week's earnings call that he was acting mainly as Chesapeake’s chairman of the board "to help guide the company to a better place, where I think we're heading." Market Thumbs Up Chesapeake will issue 19.1 million shares in the zero-premium deal. Vine investors will be paid $15 per share -- the average share price just before the deal was struck -- split between 0.2486 shares of Chesapeake stock and $1.20 in cash. The real payoff for Vine shareholders is becoming part a much larger company, which itself benefits from enhanced economies of scale. This includes investment giant Blackstone, which spearheaded Vine's initial public offering in March (NGW Mar.29'21). The firm holds a controlling interest in Vine and will have a large stake in Chesapeake when the deal closes in the fourth quarter. The overall market reaction to Chesapeake's acquisition was favorable, although some remain skeptical. "It is very much up to them to prove that this was a good deal, and it brings back memories of pre-bankruptcy Chesapeake and of companies that had been managed by current board members that also went bankrupt," Bison Interests Managing Partner Josh Young told Energy Intelligence. Still, Chesapeake shares saw solid gains in the wake of Wednesday’s announcement, with Chesapeake rising nearly 7% by Thursday's close. "The move adds Chesapeake to the list of companies taking a 'basin dominance' growth strategy," Wood Mackenzie said in a note. "Others include Pioneer and EQT. And this is the kind of deal investors can support with confidence.” That confidence is not misplaced, Dittmar said. “From here, Chesapeake should be well positioned to grow in the Haynesville. It has a deep bench of available drilling locations even without making any more major deals. The company could leverage its position to block up key drilling units via swaps with other operators or make modest bolt-ons.” Spurring More M&A It might also speed up basin consolidation, Dittmar predicted. "I'd think with both Indigo and Vine being taken off the table in the Haynesville, it puts a bit of additional pressure on other producers that would like to enter or expand in the play to make a deal with the remaining available targets.” That Chesapeake made its move in the Haynesville does not mean opportunities for consolidation in Appalachia are lacking, Dittmar said. But M&A activity in the slightly more mature play is more fixed on achieving greater economies of scale. “The major issue for Appalachian operators is to navigate around takeaway capacity constraints and it’s politically difficult to build new pipe," Dittmar explained. "So, consolidation there is more of the nature that being bigger helps you manage those challenges better because you’re able to shift production around." As for the less developed Haynesville, he said, there’s more inventory potentially remaining in the core areas and takeaway capacity is good. "And geographically, it's really well positioned for Gulf Coast markets and LNG, which are two of the key drivers of US demand," he noted. "We see Haynesville M&A as more future inventory growth-driven primarily through targeting these private equity sponsored companies, like Indigo. You can go out and buy inventory to secure your future drilling right away." Tom Haywood, Houston

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