Aggressive Chesapeake Expands Marcellus Position

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Chesapeake Energy has swallowed another key Marcellus player in the northeastern Pennsylvania core in its second $2 billion-plus buy since exiting Chapter 11 protection last February.

Chesapeake substantially boosted its position in the Marcellus Shale by acquiring Chief O&D in a deal valued at about $2.6 billion. It also sold its oil-focused assets in Wyoming’s Powder River Basin to Continental Resources for $450 million as it doubles down on a pivot back to natural gas after spending several years attempting to become a major oil producer.

Chesapeake has spent about $4.8 billion on natural gas-focused M&A expansions — including the $2.2 billion buyout of Haynesville pureplay Vine Energy — since it shed its crushing debt burden through Chapter 11 financial restructuring nearly a year ago.

Place of Strength

As a testament to just how financially sound Chesapeake has become since exiting bankruptcy, the $2 billion cash portion of the Chief transaction will be financed with cash on hand, as well as the proceeds from the sale of its Wyoming assets.

For the rest, the company will rely on its revolving credit facility, with the expected incurred debt bringing its debt-to-earnings ratio to just 0.8, as calculated by current commodity strip pricing. Chesapeake is also issuing about 9.44 million shares of common stock. The transaction is expected to close by the end the first quarter.

With the purchase of Chief and associated nonoperated interests held by affiliates of investment firm Tug Hill, Chesapeake will be adding 113,000 net acres producing roughly 835 million cubic feet per day of gas, which CEO Nick Dell’Osso said “fits hand in glove” with its assets.

With its new acreage, Chesapeake expects to generate $9 billion in free cash flow over five years at current commodity prices.

“But what may be a little bit less obvious and is really important to the deal is that we share a lot of gathering system capacity here," said Dell'Osso. "And we gain a lot of access to incremental delivery points in the marketing across the basin,” which will give Chesapeake more egress out of the Marcellus on the Tennessee Gas, Transco and the Atlantic Sunrise systems.

Dell'Osso said that meant the company will have "better access to out-of-basin pricing" and that it will be better able to manage its production and pressure across the system and open up incremental capacity that "wasn't available individually."

“So we talked about how constrained the market is and how limited we were in our ability to grow our Marcellus asset, and this deal provides a solution," he added.

ESG Concerns

Dell’Osso said the Chief acquisition would also lower Chesapeake’s overall emissions profile. The acquired dry gas assets are expected to improve Chesapeake’s methane intensity by 15% over 2020 levels, addressing one of several key metrics for investors’ environmental, social and governance (ESG) concerns.

Chesapeake has publicly committed to lowering its carbon footprint, including a pledge to reduce methane intensity to 0.09% company-wide by 2025.

Part of the company’s ESG strategy involves natural gas certification, including partnerships with outside certification entities MiQ, Project Canary and Equitable Origin. Dell’Osso said during the call that Chief did not have any certification initiatives, so Chesapeake is planning to incorporate those assets into its processes.

Chesapeake had previously targeted finishing up certification for its Marcellus assets in the second quarter of this year, but Dell’Osso said the Chief properties would be included by the end of the year.

“We don't anticipate a whole lot of challenge there, other than just some work to do with the certifying group to get it up to speed and get the information to them and bring them along,” he said. “[It will] just take some time.”

Continental Benefit

Meanwhile, Continental's acquisition of Chesapeake's Powder River assets reinforces its corporate strategy to move beyond the Bakken tight oil play.

Continental moved into the Powder River early last year, buying the assets of private Samson Resources for $215 million. That was followed by its $3.25 billion purchase of Pioneer Natural Resources’ Delaware Basin assets.

“The moves by Continental are likely in response to a maturing Bakken asset base and the limited opportunities to add quality oil inventory in that play via M&A,” said Enverus Director Andrew Dittmar.

He added that Continental's increasing focus on the Powder River differentiates it from its large-cap peers.

“The team at Continental clearly likes the rock in the Powder River and it presents a far less competitive M&A landscape than the Permian,” said Dittmar.

M&A, Shale, Corporate Strategy , Independent E&Ps
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