NEW YORK--(BUSINESS WIRE)--The $5.4 billion southern Marcellus and Utica shale asset sale announced yesterday is considered to be a strategic win-win for both Chesapeake Energy Corp. (Chesapeake [BB/Positive]) and Southwestern Energy Company (Southwestern [BBB-/Stable]), according to Fitch Ratings. Chesapeake stands to monetize a non-core asset that will provide considerable proceeds to continue paying down debt and simplifying its capital structure as well as pursue other strategic initiatives. Southwestern will gain complementary acreage that provides management with an opportunity to apply its operating expertise in an attractive, lower risk position.
The pending $5.4 billion acquisition is for a majority interest in 413,000 net acres of liquids and natural gas assets within the southern Marcellus, Utica, and Devonian plays. Transaction execution is subject to the consent and preferential right of the principal co-owner, which has 30 days to exercise their rights. The asset purchase is expected to close by year end. Southwestern has indicated that it will fund the deal with a combination of debt and equity with additional funds possibly derived from the disposition of non-strategic assets. The company has secured a commitment for a $5 billion 364-day senior unsecured bridge term loan to finance the transaction on an interim basis.
Chesapeake management continues to demonstrate an ability to execute on its operational and financial improvement initiatives. Fitch believes the early stage, non-core nature of the asset will not materially affect production and cash flow. Furthermore, Fitch expects the company to manage capital spending within cash flows. Fitch estimates that pro forma 2014 adjusted debt/EBITDA is likely to improve to approximately 2.5x.
Southwestern management's move to acquire reserves, instead of prospective resources, is uncharacteristic. However, Fitch believes that it reflects the size of the company and suggests there are increasingly limited opportunities to acquire substantial US onshore positions. The acquisition still provides management with an opportunity to employ its operational expertise to achieve development and cost efficiencies. The company estimates the transaction will provide over 20 years of drilling inventory based on its preliminary plans to deploy 4-6 rigs in 2015 and increase the rig count to 11 by 2017.
Fitch believes that, given the size of the transaction, pro forma leverage metrics are likely to exceed our debt/EBITDA negative rating sensitivity of 2.0x over the near term as the company develops the acquired acreage position. However, our affirmation of the 'BBB-' rating and Stable Rating Outlook reflect Fitch's expectation that management will secure permanent financing within 90 days of closing that will result in mid-cycle debt/EBITDA at or below 2.0x within the rating horizon as well as maintenance of other financial and operational measures consistent with the rating.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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