Southwestern to Buy Montage Resources: What You Need to Know
Southwestern Energy Company SWN recently agreed to acquire a smaller natural gas producer, Montage Resources Corporation MR, in an all-stock deal. The deal is expected to boost Southwestern’s Appalachian Basin footprint with high-return Marcellus and Utica assets. Following the news of the acquisition, Montage Resources’ shares declined 5.7% yesterday, while Southwestern stock was unchanged.
Per the deal, shareholders of Montage Resources will receive 1.8656 Southwestern shares for each Montage Resources share they hold. Southwestern started an underwritten public offering of 55 million shares (representing 10% of outstanding shares), the proceeds of which will be utilized to retire a portion of Montage Resources' 8.875% senior notes that are due 2023. If the acquisition does not take effect, the proceeds from the offering will likely be used in debt repayment by Southwestern. Notably, the total debt of the combined company was $3,108 million at second quarter-end.
The move is expected to create the third-largest producer in the Appalachian Basin that will produce around 3 billion cubic feet of natural gas equivalent per day (Bcfe/d). Notably, Southwestern produced 2.2 Bcfe/d in the second quarter of 2020. The deal will likely be closed in the December quarter. The combined company is likely to have 208,894 net acres in Northeast Appalachia and 577,293 net acres in Southwest Appalachia. At 2019-end, the combined entity had total proved reserves of 15,451 Bcfe.
Southwestern’s operational proficiency will likely enable the combined company to generate additional scale and synergies from its merged assets. The deal will likely help the combined company to save $30 million per annum in general and administrative expenses. Moreover, the acquisition is likely to enhance free cash flow and improve the acquirer’s returns. Based on the current strip pricing, Southwestern expects to generate free cash flow of around $100 million per annum from the next year. This can be exciting for the company, given the fact that it generated negative $280 million in free cash flow in the trailing 12-month period.
The current market volatility allows Southwestern to acquire rich assets at beaten down price. In fact, we have witnessed some other merger and acquisition deals in this turbulent period. Chevron Corporation CVX proposed a more than $5 billion merger deal with Noble Energy for the latter’s Eastern Mediterranean assets. In another deal, Canadian Natural Resources Limited CNQ recently agreed to acquire all issued and outstanding common shares of its smaller rival Painted Pony Energy.
Price Performance
Southwestern, which currently has a Zacks Rank #3 (Hold), has surged 68.8% in the past year against 31.7% decline of the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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