Southwestern Energy Co. is moving beyond the Appalachian Basin to expand its natural gas opportunities with a $2.7 billion takeover of Haynesville Shale pure-play Indigo Natural Resources LLC.
The Houston independent, a Lower 48 pioneer in unconventional drilling techniques, said the merger would boost production to 4 Bcfe/d, 85% weighted to natural gas. Indigo, which now produces 1 Bcf/d net, has core dry gas assets across the stacked Haynesville and Bossier zones in North Louisiana.
Combining the gassy leaseholds in Appalachia and the Haynesville is a “perfect recipe for success,” Southwestern CEO Bill Way said during a conference call with investors.
“We know the Appalachian Basin,” he said. “We know Haynesville…quite well…We know quality, we know strategic benefits. We understand the importance of discipline…”
Southwestern was developing wells in the East Texas portion of the Haynesville at the start of the unconventional revolution in the mid-2000s until it began selling off the leasehold in 2010. Before it became an Appalachian pure-play, the independent was the leading Fayetteville Shale producer.
With Indigo, Southwestern’s footprint would extend “across the two premier natural gas basins in the country,” with dry gas and a liquids-rich inventory, Way said. “The value of this high quality inventory is further enhanced by our diverse transportation portfolio providing access to premium markets in the Gulf Coast and within Appalachia.”
Taking over Indigo is a “very logical move for us,” he told investors. Appalachia and the Haynesville are the “two leading natural gas basins in the United States. As we looked at different opportunities, those were our two primary focus areas…”
Southwestern in November added to its Appalachian cupboard with the takeover of Montage Resources Corp. During 1Q2021, the company produced 269 Bcfe, 79% weighted to natural gas, and up from 201 Bcfe in the year-ago period.
Gulf Coast LNG Access
Indigo would give Southwestern prime Gulf Coast access to liquefied natural gas (LNG) export markets and the burgeoning industrial complex. Indigo, with 149,000 net acres in the Haynesville-Bossier formations, has around 1,000 drilling locations. Southwestern has an estimated 5,000 locations in Appalachia. At a planned place, there are about 14 years of maintenance inventory, according to Southwestern.
As important, Southwestern expects its margins in 2022 to climb by 12%, resulting from gaining access to the Gulf Coast LNG and petrochemical corridor. Cumulative free cash flow is projected to increase to $1.2 billion in 2023 from 2021.
Indigo most recently reported production of 0.9 Bcf/d net following a sale of its Cotton Valley assets. Diversified Energy Co. plc in May paid $115 million net for a package of the northwestern Louisiana assets from subsidiary Indigo Minerals LLC. Indigo’s capital budget this year is set at $500-525 million, with up to 44 wells scheduled to be turned to sales.
Once Indigo is integrated, Southwestern expects to run four rigs in Louisiana in 2022, with up to 40 wells turned to sales. Synergies are expected to reduce general/administrative expenses by $20 million.
The transaction, set for completion by year’s end, has been unanimously approved by each board. To complete the transaction, Southwestern agreed to pay Indigo $400 million cash and trade $1.6 billion in common stock, or an estimated 339 million shares. It also is assuming $700 million of 5.375% senior notes due in 2029. No Indigo shareholder is to receive more than 10% of Southwestern’s pro forma outstanding shares in connection with the transaction.
Like the Cabot Oil & Gas Corp.-Cimarex Energy Co. transaction announced in late May, Southwestern and Indigo “have no acreage overlap and little to offer in the way of operations” and synergies, according to Raymond James & Associates Inc. “However, the natural gas production profile remains for Southwestern, and the deal brings modest cash flow accretion…”
Most notably, said analysts, free cash flow is forecast to nearly double in 2022, up 96% to $470 million, based on $2.75/Mcf New York Mercantile Exchange gas prices and $58/bbl West Texas Intermediate oil.
BMO Capital Markets analyst Phillip Jungwirth said Southwestern “was an expected consolidator, so the deal isn’t a surprise,” and it worked in the Haynesville previously. Indigo has public debt, Jungwirth noted, “so investors are familiar with the company…”
‘Extremely Active’ M&A Market
In an “extremely active” merger and acquisitions (M&A) market, “it seemed like only a matter of time before one of the large private Haynesville operators was rolled up in a multi-billion deal,” said Enverus senior M&A analyst Andrew Dittmar.
The transaction, he said, tops that of Haynesville pure-play Comstock Resources Inc., which in 2019 took over privately-held Covey Park Energy LLC in a transaction that at the time created the largest player in North Louisiana/East Texas.
“The industry is overall bullish on the outlook for gas, and the Haynesville provides one of the two major sources of low-cost supply along with the Appalachian Basin,” Dittmar noted. “It also has the advantage of favorable geographic positioning near the Gulf Coast and its associated petrochemical and LNG export demand and strong infrastructure support.”
The “ease” to move gas to the Gulf Coast “is one advantage the Haynesville carries over Appalachia, where infrastructure is more constrained and building new pipelines has proven challenging,” Dittmar said.
Enverus is estimating that Haynesville production would grow 25% by the end of 2022 to 14 Bcf/d.
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