In the second merger announced this week between publicly traded oil and gas producers, Oklahoma City-based Chesapeake Energy Corp. said Tuesday that it had agreed to buy WildHorse Resource Development of Houston for nearly $4 billion in cash, stock and debt.
Three law firms with offices in Texas represented parties on the deal.
Wachtell, Lipton, Rosen and Katz and Baker Botts advised Chesapeake. The Baker Botts team included partners Clint Rancher and Joshua Davidson and associates Jamie Yarbrough, Stephen Noh, Josh Gonzales and Mitch Athey.
Baker Botts specialists included partners Richard Husseini and Jon Lobb on tax; partner Lyman Paden and associate Chad Davis on finance; partner Gail Stewart, senior associate Krisa Benskin and associate Gabriela Alvarez on employee benefits; partner Erin Hopkins and associates Justin Clune and Taylor Lopez on global projects; and partner Scott Janoe and associate Mark Hamlin on environmental.
Vinson & Elkins represented WildHorse, including partners Steve Gill and Doug McWilliams and associates Claire Campbell, McCall Grimes, Crosby Scofield, Sara Bloom, Andrianna Frinzi and Michael Pascual.
Gill also worked on Denbury Resources’ $1.7 billion purchase of Penn Virginia announced Monday.
V&E specialists included tax partner Lina Dimachkieh, employee benefits partner David D’Alessandro, environmental partner Larry Nettles and litigation partner Michael Holmes.
Akin Gump Strauss Hauer & Feld assisted WildHorse’s largest investor, Dallas-based NGP, including John Goodgame, Jocelyn Tau, Cynthia Angell and Litian Chen.
WildHorse’s in-house team included general counsel Kyle Roane, who previously was general counsel at Memorial Resource Development and counsel at Akin Gump.
Roane had help from assistant general counsel Brad Coffey, who previously was division counsel at Range Resources and assistant general counsel at Memorial Resource and practiced at Beck Redden.
Latham & Watkins counseled WildHorse investor the Carlyle Group with attorneys outside of Texas.
Goldman Sachs’ Bill Lambert provided financial advice to Chesapeake. WildHorse was assisted by Tudor, Pickering, Holt’s Maynard Holt, Chad Michael and Cameron Alguire; Morgan Stanley’s John Bishop and Michael Harris; and Guggenheim Securities’ Joel Foote.
WildHorse stockholders can choose between 5.989 shares of Chesapeake stock for each of their shares or 5.336 shares of Chesapeake and $3 per share in cash.
Chesapeake shareholders will end up with 55 percent of the combination while WildHorse stockholders will hold 45 percent.
The offer implies a valuation of $22.85 per share for WildHorse’s stock, which represents a “skinny” 24 percent premium over WildHorse’s closing price Monday, Seaport Global Securities analyst Mike Kelly said in a note (WildHorse’s stock closed up 6.4 percent on Tuesday to $19.60 while Chesapeake’s dropped 12 percent to $3.27.)
Chesapeake got a “heck of a deal, probably too good of a deal” from the perspective of a WildHorse shareholder, Kelly said. He thinks WildHorse’s net asset value approximates $32 per share, 40 percent higher than Chesapeake’s offer, and that the combination will be over-levered and too focused on natural gas (around 70 percent of its production).
WildHorse has operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas covering about 420,000 net acres, 80 to 85 percent of which is undeveloped. It went public less than two years ago and had $930 million in debt as of June 30.
Chesapeake said WildHorse’s properties complement its high margin Eagle Ford properties – making it one of the largest players in the basin – as well as its Powder River Basin position.
The buyer also said the acquisition will double its oil production to 30 percent (from 19 percent); boost its EBITDA margins per barrel by 35 percent next year and 50 percent by 2020; help it achieve sustainable free cash flow generation; and reduce its net debt-to-EBITDA ratio from 4.2 to 3.6 times next year and 2.8 times in 2020, versus its goal of 2 times.
The two companies expect to save between $200 million and $280 million in annual costs over the first five years by combining, or $1 billion to $1.5 billion by 2023. Those savings are expected to come from operational and capital efficiencies along with elimination of redundant corporate overhead.
On the sidelines of Deloitte’s oil and gas conference in Houston on Tuesday, Chesapeake CEO Doug Lawler said the company had been looking for an acquisition and talked to WildHorse about a combination for a few months. “We got to a point where we could competitively go after acquisitions,” he said.
When asked about negative investor and analyst reaction to the deal, Lawler emphasized that the transaction will add oil production and help it deleverage. “The market noise will settle out,” he said.
Chesapeake has struggled over the last several years with a heavy debt load accumulated from a land grab by Lawler’s predecessor, the late Aubrey McClendon. It also has had a heavy focus on natural gas, whose prices have been depressed for years given high supply from new discoveries around the U.S. but not enough demand.
Over the last six years, the company has worked to turn the situation around, including eliminating $12.2 billion in debt, reducing capital expenditures by $12 billion, removing $1 billion in capital costs and erasing $10.3 billion in midstream and downstream commitments.
Chesapeake generated a $60 million profit in the third quarter versus a $41 million loss in the same period last year.
WildHorse CEO Jay Graham said in a statement that the combination creates an impressive oil growth platform that provides immediate value and potential for long-term upside to its shareholders given Chesapeake’s technical expertise and operational efficiencies.
NGP managing partner Tony Weber said he has confidence in the leadership team’s strategy and ability to deliver incremental, meaningful value creation.
Before the deal closes, WildHorse will pick two individuals, expected to be Graham and WildHorse director David Hayes, to be added to Chesapeake’s board. Chesapeake chairman R. Brad Martin and Lawler will continue in their roles.
Chesapeake expects to close the deal in the first half of next year if it clears both companies’ shareholders. It will finance the cash portion of the transaction, expected to be between $275 million and $400 million, through its revolver.