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Chesapeake shares fall on $4 billion acquisition.

Byline: Sarah Terry-Cobo

OKLAHOMA CITY After five years of improving the books, Chesapeake Energy CEO Doug Lawler announced a major acquisition Tuesday. The company will purchase private-equity-backed oil drillerWildHorse Resource Development for nearly $4 billion in a combined credit and stock deal.

News of the acquisition pushed the company's stock price down 12 percent to $3.27 per share Tuesday. The company's new focus on production growth and the cost of the transaction led to a sell-off of Chesapeake shares.

Lawler said the deal marks a major transformation for the company by adding more crude to its portfolio and lowering its debt-to-profit ratio. Energy finance professor Deborah Fleming at Oklahoma City University said one of the largest selling points is that it increases Chesapeake's oil mix from 19 percent to about 30 percent.

"It is notable because it is a strategic change and it will put them in a growth mode, in an offensive mode rather than a defensive mode," she said.

WildHorsesold about 420,000 contiguous acres in the South Texas Eagle Ford Shale and the Austin Chalk. About 80 percent of the land leases haven't been drilled yet, providing tremendous opportunities, Lawler said. WildHorseshareholders can get either 5.989 shares of Chesapeake's common stock or a combination of 5.336 shares of Chesapeake's common stock and $3 cash per WildHorse share. WildHorseshareholders will own about 45 percent of Chesapeake's shares when the deal is completed, according to Chesapeake.

Lawler said WildHorse's assets are close to the Gulf Coast, providing attractive assets to premium-priced export markets. He said he expects to deliver material savings, up to $280 million per year, eliminating redundant corporate overhead.

Fleming said with a deal that dilutes Chesapeake's shareholders, they're giving up a large ownership to gain WildHorse's attractive assets. While there is no certainty with the deal, there are lots of opportunities, all of which must be proven.

"Doug Lawler has done a great job to cut costs and get the balance sheet back in order and here they're kind of switching gears," Fleming said. "So they will have to prove they can integrate another company. Their cost-cutting projections are very aggressive, so they will have to execute almost flawlessly to get those cost cuts in."

University of Central Oklahoma energy finance professor Stuart MacDonald said though the deal is incredibly dilutive for Chesapeake shareholders, Lawler is making a good decision by taking a risk.

The Austin Chalk was a big hit in the 1970s, but the play was highly variable and very fractured. Vertical drilling techniques during that era weren't effective in hitting the pay zones. Horizontal drilling provides an opportunity to drive a wellbore through the fractures and capture more resources, MacDonald said.

"The Austin Chalk has potential and could pay off big," he said. "If I were a shareholder, I would like to see them take chances. Otherwise, (the company's assets) would gradually decline. It's a good move, considering the spot they're in."

Lawler began five years ago with a mandate from the company's board to make changes: cut debt, make the balance sheet less complex, sell unrelated businesses and reduce expenses, among other things. He has eliminated $12 billion of about $20 billion in debt, eliminated $10 billion in complex contracts and deals with partners, and shaved off $1 billion annually in cash costs.

Fleming said the acquisition hints at one bit of history when Chesapeake had a multitude of drilling opportunities in several plays across the nation. The staff knows how to drill and how to approach things on a large scale and they're in a profitable position in the Eagle Ford Shale.

The WildHorse deal is a bet the new, combined company can do well in the future, she said.

"It is a transformational transaction if it works," Fleming said.

Chesapeake's stock, which trades on the New York Stock Exchange under the symbol CHK, fell more than 12 percent during Tuesday's trades to close at$3.27 per share, 45 cents lower than Monday's close. WildHorse's stock, which trades on the NYSE under the symbol WRD, rose in Tuesday's trading more than 6 percent, closing at $19.60, or $1.18 per share more than the previous day's closing price.

Chesapeake reported third-quarter net income of $84 million, after reporting a net loss of$18 million in the same period a year earlier. It had reported earnings per share of 7 cents with adjusted earnings per share at 19 cents. The driller beat analysts' expectations for earnings per share by 3 cents.

Third-quarter revenue was $2.42 billion, up 24 percent from $1.94 billion in the same period the prior year. Its adjusted revenue was $1.2 billion, which also beat Wall Street forecasts.

The Associated Press contributed to this report.

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Publication:Journal Record (Oklahoma City, OK)
Geographic Code:1U5VA
Date:Oct 30, 2018
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