Southwestern buys another Haynesville gas producer as LNG demand climbs

Continuing to grow by buying other companies' wells, shale gas producer Southwestern Energy Co. doubled down on the Haynesville Shale and its proximity to LNG export terminals by announcing the $1.85 billion purchase of the play's third-largest private operator, GEP Haynesville LLC.

Southwestern announced the deal before the markets opened Nov. 4, hours after posting third-quarter results that soundly beat analysts' expectations due to high commodity prices. The company reported $188 million in adjusted earnings for the quarter, quadruple its earnings for the same quarter a year ago, thanks to a 41% year-over-year increase in realized natural gas prices to $2.15/Mcf and an 84% rise in NGL prices to $19.31 per barrel.

Adjusted earnings per share were 24 cents, beating the S&P Capital IQ consensus estimate of 22 cents per share.

The GEP deal is Southwestern's third shale gas acquisition in the past year. The producer bought Appalachian driller Montage Resources Corp. for nearly $900 million in November 2020 and Haynesville operator Indigo Natural Resources LLC for $2.6 billion in September.

The Haynesville's proximity to LNG export terminals was on Southwestern's mind when it cut a deal that would make it the largest natural gas producer in the play along the Louisiana-Texas border, President and CEO William Way told analysts on a Nov. 4 conference call to discuss earnings and the newly announced deal.

"With the expanded exposure to the LNG corridor and the growing demand centers along the Gulf Coast, this acquisition will further improve the company's overall basis differentials and increase our margins," Way said. "The access to high-value global markets will supplement our premium Appalachia outlets."

Southwestern is not alone in adding gas volumes because of LNG demand in the Haynesville. Chesapeake Energy Corp. recently closed a $2.26 billion deal for Blackstone Inc.-backed driller Vine Energy Inc. GEP is a unit of Blackstone-backed GeoSouthern Energy Corp. The play's largest producer, Comstock Resources Inc., has accelerated drilling activity to capture increased LNG demand.

"The rapid increase in gas prices internationally has illustrated the importance of U.S. LNG exports globally, and we are more confident in the outlook for export growth," Mizuho Securities USA LLC oil and gas analyst Vincent Lovaglio told clients Oct. 17. Mizuho said Haynesville production will need to make up for increased gas demand because Appalachia's exploration and production companies have decided not to spend more to add volumes despite higher commodity prices.

The immediate effect of the deal, which requires Southwestern to throw in $1.325 billion in cash, is to delay any share buyback or dividend increase returning cash to shareholders, analysts said. "The transaction appears mildly accretive to financial metrics but comes at the cost of a lot of debt," Piper Sandler oil and gas analyst Kashy Harrison told clients before the call. "From a macro perspective, consolidation of the Haynesville into fewer public hands is a positive."

Southwestern Executive Vice President and CFO Carl Giesler told analysts that the added cash flow from GEP's wells will be used to quickly pay down debt and put the company in a position to start paying shareholders soon. "Given our increased scale, with the current commodity price outlook, we would expect approximately $2.3 billion in free cash flow over the next two years," Giesler said.

In 2022, Southwestern should produce about $1 billion in free cash flow, assuming production from GEP's assets of 700 MMcf/d and average NYMEX gas price of $4/MMBtu for the year, according to the company's deal presentation.

Investor reaction to the deal news and third-quarter results was ambivalent, with shares trading above and below the open Nov. 4. By early afternoon, Southwestern shares dropped 1.5% to $4.97 per share on a normal volume of trades.