Chesapeake Energy Corp. (NYSE: CHK) on Oct. 30 announced a blockbuster deal for WildHorse Resource Development Corp. (NYSE: WRD) worth nearly $4 billion the Oklahoma City-based company expects will create an Eagle Ford oil producing powerhouse.
As part of the deal, Chesapeake will acquire WildHorse, a Houston-based company with operations in the Eagle Ford Shale and Austin Chalk, in exchange for either 5.989 shares of Chesapeake common stock or a combination of 5.336 shares of Chesapeake common stock and $3 in cash.
Chesapeake also agreed to assume WildHorse’s net debt, as of June 30, of $930 million. The company expects to finance the cash portion of the Wildhorse acquisition, which is expected to be between $275 million and $400 million, through its revolving credit facility.
“The complementary WildHorse assets build upon our existing Eagle Ford position and with our Powder River Basin position gives us two powerful oil growth engines in our portfolio,” Chief Executive Officer Doug Lawler said on a call with analysts.
Chesapeake has been directing its capital toward oil production against the backdrop of rising crude prices and declining natural gas prices.
The company said its shareholders will own about 55 percent of the combined company, while WildHorse shareholders will own the rest.
Chesapeake Energy posted solid third-quarter results on Tuesday. The company recorded $174 million, or $0.19 per share, of adjusted net income, which beat analysts’ expectations by $0.04 per share. The company posted a net profit of $60 million for the third quarter, following a loss of $41 million a year earlier. Fueling that stronger-than-expected result was production, which rose 5% year over year, driven by a 13% increase in higher-margin oil output thanks to strong drilling results from the Powder River Basin.
The transaction will do several things for Chesapeake Energy:
- It will materially increase the company’s oil production and enhance its oil mix. Chesapeake Energy sees its adjusted oil production doubling by 2020 while oil’s share of its output will rise from 19% to 30%.
- It will transform the company’s portfolio by adding a new oil growth engine since more than 80% of WildHorse’s 420,000 net acres in the Eagle Ford shale are undeveloped.
- The combination will save the company $200 million to $280 million per year thanks to operational and capital efficiencies.
- The deal will accelerate Chesapeake Energy’s deleveraging by improving its net debt-to-EBITDA ratio to 3.6 next year and 2.8 by 2020, putting it closer to its target of 2.
CHK Stock Price
Chesapeake shares have lost about 6.1% since the beginning of the year versus the S&P 500’s decline of -1.2%. Investors have punished shares of oil and gas producers that have struck deals this year for higher production instead of focusing on improved returns.