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JPMorgan Chase Backs National Fuel Gas Co.’s Acquisition of Shell Assets in Pennsylvania

May 05, 2020, 08:00 AM
Filed Under: Oil & Gas
Related: JPMorgan Chase

National Fuel Gas Company announced that it has entered into a purchase and sale agreement with SWEPI LP, a subsidiary of Royal Dutch Shell plc, to acquire Shell’s upstream and midstream gathering assets in Pennsylvania for total consideration of approximately $541 million, less closing adjustments that are estimated to reduce the consideration provided at closing to approximately $500 million. The transaction is expected to close on July 31, 2020, with an effective date of January 1, 2020, and is subject to customary closing conditions. The transaction is not contingent on financing conditions, and the Company has taken appropriate steps to ensure it has ample liquidity and protections as it pursues permanent financing for the acquisition.

In contemplation of this transaction, and in order to protect the highly accretive economics of the acquisition, the Company has executed significant additional NYMEX natural gas hedges. For fiscal years 2021 and 2022, the Company has entered into NYMEX hedges equivalent to approximately 75% and 55% of the acquired PDP production, respectively, at average weighted prices of $2.71 and $2.54, respectively. Overall, the Company currently has hedges and fixed price physical sales in place for approximately 75% of its expected PDP production in fiscal 2021. Further details on the Company’s updated hedging positions are provided in the Company’s May 2020 investor presentation.

“National Fuel’s acquisition of these high-quality assets in one of the most prolific areas in Appalachia will provide the Company with a unique and highly strategic opportunity to further its integrated development approach in the region,” said David P. Bauer, the Company’s President and Chief Executive Officer. “With significant economies of scale provided by Shell’s large Tioga County acreage footprint, which is contiguous to our existing development areas, along with significant, integrated gathering facilities, and valuable pipeline capacity, Shell’s assets are a perfect fit for the Company’s diversified business model, and provide meaningful synergies with our existing operations.”

“We expect this transaction to be immediately accretive to the Company’s earnings per share and to generate substantial incremental free cash flow over the next several years while providing meaningful upside for the Company,” continued Bauer. “We believe that this cash flow generation, along with our acquisition of significant flowing natural gas production and reserves at an attractive valuation, and a financing strategy that protects and strengthens our balance sheet, will leave National Fuel well-positioned for the long-term.”

Permanent financing is expected to be comprised of approximately equal proportions of equity, including equity-linked securities, and long-term debt, a financing mix that will maintain the Company’s strong balance sheet and investment-grade ratings. As part of the equity component of the permanent financing, the purchase and sale agreement provides the Company with the right to issue up to $150 million in common equity to Shell at an agreed-upon price of $38.97 per share, the details of which are described further in the purchase and sale agreement filed as an exhibit to the Form 8-K filed with the Securities and Exchange Commission in conjunction with this press release. In addition, the Company has made a $27.1 million deposit that will be credited against the purchase price at the closing of the transaction.

To further enhance its short-term liquidity position, the Company also closed on a $200 million unsecured 364-day credit facility arranged by JPMorgan Chase Bank, N.A. This new credit facility, in combination with the over $500 million currently available under the Company’s existing multi-year credit facility, provides significant liquidity as the Company pursues its permanent financing plans.

J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC are serving as financial advisors to National Fuel. Kirkland & Ellis LLP and Jones Day are acting as legal advisors to the Company.

As part of the transaction, the Company will acquire over 200,000 net acres in Tioga County, with net proved developed natural gas reserves of approximately 710 Bcf. At closing, these assets are expected to have flowing net production from both the Utica and Marcellus shale formations of approximately 215-230 MMcf/d, with shallow base declines and an average net revenue interest of approximately 86.5%. In addition, the Company will acquire approximately 142 miles of gathering pipelines and related compression, over 100 miles of water pipelines, and associated water handling infrastructure, all of which currently support Shell’s Tioga County production operations.

These gathering facilities are interconnected with various interstate pipelines, including the Company’s Empire pipeline system, with the potential to tie into the Company’s existing Covington gathering system.

Post-closing, the acquired assets are expected to generate net natural gas production in the range of 70 to 75 Bcf over the following twelve months. Given their contiguous nature, the Company expects to fully integrate the assets into its existing operations in Tioga County, Pa. This is expected to drive immediate operating cost synergies in the E&P segment, with increased production expected to reduce cash operating expenses by approximately $0.05 to $0.08 per Mcfe on an annualized basis post-closing. The gathering and compression facilities included in this transaction transport the entirety of the acquired production and are expected to generate approximately $35 million in incremental EBITDA in the Gathering segment over the same period.

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