Chesapeake To Acquire Eagle Ford Producer WildHorse For Nearly $4 Billion

Editor's note: This is a developing story. Check back for more details and analysis throughout the day on OilandGasInvestor.com.

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.

Doug Lawler, Chesapeake’s president and CEO, said he expects the acquisition of WildHorse to expand the company’s oil growth platform and accelerate progress toward its strategic and financial goals of enhancing margins, achieving sustainable free cash flow generation, and reducing net debt to EBITDA ratio.

WildHorse, which only went public less than two years ago, has been a dominant force in South Texas, building a roughly 420,000 net acre position in the Eagle Ford Shale and Austin Chalk formations. The company’s acreage, about 80% to 85% of which is undeveloped, also has strategic access to premium Gulf Coast markets. Net production from the assets is about 47,000 barrels of oil equivalent per day (boe/d), of 88% is liquids and 73% is oil.

Chesapeake said the addition of the WildHorse asset creates an expansive oil growth platform which complements the company’s existing high margin Eagle Ford and Powder River Basin positions. Moving forward, the company expects over 80% of future drilling and completion activity will be directed toward high-margin oil opportunities.

“The addition of WildHorse, together with our substantial growth profile in the Powder River Basin, advances our transformation into a highly competitive company with a diverse portfolio of high-quality assets, a stronger balance sheet and meaningful oil-growth potential,” Lawler said in a statement.

Pro forma, Chesapeake’s position in the Eagle Ford will grow to roughly 655,000 net acres with about 150,000 boe/d of production, about 60% oil. The company also expects the combination to help it save between $200 million and $280 million in annual costs.

Further, the WildHorse acquisition is projected to double Chesapeake’s adjusted oil production by 2020 from stand-alone adjusted 2018 estimates, increasing to a projected range of 125,000 to 130,000 barrels per day (bbl/d) of oil in 2019, and 160,000 to 170,000 bbl/d of oil in 2020. Additionally, Chesapeake’s 2020 projected adjusted oil production mix is expected to increase to roughly 30% of total production, compared to about 19% today.

Jay Graham, CEO and chairman of WildHorse said in a statement: “We are extremely proud of the company we built and brought public less than two years ago. This combination creates an impressive oil growth platform which provides both immediate value and potential for significant long-term upside to our shareholders. As a highly regarded operator, Chesapeake brings the technical expertise and operational efficiencies needed to maximize the value of this premier asset.”

Upon closing, Chesapeake shareholders will own about 55% of the combined company. WildHorse shareholders will own roughly 45%, depending on the consideration elected.

WildHorse's shares surged 13.5% to $20.50 in premarket trading on the news, while Chesapeake shares slumped 8% to $3.42.

Investment funds managed by NGP Energy Capital Management LLC, collectively WildHorse’s largest shareholder, have entered into a voting and support agreement in support of the transaction, which is expected to close in first-half 2019.

Chesapeake also reported third-quarter results on Oct. 30, which showed a net profit of $60 million for the three months ended Sept. 30, compared with a loss of $41 million a year earlier.

Excluding one-time items, the company earned 19 cents per share. Wall Street analysts on average had expected 15 cents, according to Refinitiv data. It was not immediately clear if the figures were comparable.

Revenue jumped to $2.42 billion from $1.94 billion.

Goldman Sachs & Co. LLC was financial adviser to Chesapeake for the WildHorse acquisition, and Wachtell, Lipton, Rosen & Katz and Baker Botts LLP was its legal counsel. Tudor, Pickering, Holt & Co., Morgan Stanley & Co. LLC and Guggenheim Securities LLC acted as financial advisers to WildHorse and Vinson & Elkins LLP and Akin Gump Strauss Hauer & Feld LLP were the company’s legal counsel.

Emily Patsy can be reached at epatsy@hartenergy.com. Reuters contributed to this article.