September 4, 2018 / 5:11 PM / 4 months ago

UPDATE 1-Southwestern Energy to sell Fayetteville shale unit for $1.87 bln

(Adds comments from Southwestern CEO, details about transaction)

Sept 4 (Reuters) - Oil and gas producer Southwestern Energy Co agreed to sell its Fayetteville shale assets in Arkansas to privately owned Flywheel Energy LLC in an all-cash deal for about $1.87 billion, Southwestern said on Tuesday.

The deal culminates a six-month effort by the Houston-based company to find a buyer for its Fayetteville shale operations to pay off debt it ran up years ago when U.S. natural gas prices were higher.

"The debt was an overhang on our stock," Southwestern Energy Chief Executive Officer Bill Way said in an interview. "We're focused on the highest-return projects in our portfolio, and at today's prices, those are in the Appalachia basin."

Southwestern plans to pay off $900 million of its more than $3 billion in debt with the proceeds, and will spend $200 million to repurchase shares over the next 12 months, Way said.

Southwestern's shares declined 2 percent to $5.50 on Tuesday following the announcement. The deal's value was below market expectations for $2 billion, according to people familiar with the matter.

Several potential buyers had expressed interest, said Way, who declined to name the suitors. Southwestern will turn its focus to expanding its natural gas and gas-liquids output in Pennsylvania and West Virginia.

In July, BHP Billiton sold its Fayetteville assets for about $300 million to Merit Energy Co as part of its exit from U.S. shale properties. Low gas prices have encouraged companies to seek more profitable liquids production.

Southwestern had $4.7 billion in debt in 2016 and will have $2.3 billion in debt after the deal closes, which is expected in December. All of its capital spending in 2019 will go to investments in the northeastern United States.

"With the need to reduce debt and blessed with high-return projects, the Fayetteville could not compete for capital," Way said. "Our goal is to have a self-funding Appalachia business as we complete 2020."

Backed by investment firm Kayne Anderson, Flywheel will assume $438 million of future contractual liabilities. (Reporting by Shanti S Nair in Bengaluru and Collin Eaton in Houston; Editing by Arun Koyyur and Jeffrey Benkoe)

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