How the ‘Surprising’ Acquisition of WildHorse Resource Benefits Chesapeake Energy

Chesapeake Energy Corporation's decision to acquire WildHorse Resource Development for nearly $4 billion in cash and stock came as a surprise to many investors, especially given the recent oil rout.

However, the CEO of Chesapeake Energy, Doug Lawler, labeled this deal as one of the most exciting events in the recent history of the company, in terms of it could potentially transform the company.

So how would this deal help Chesapeake Energy?

First, the acquisition of WildHorse is expected to strengthen and accelerate the delivery of Chesapeake's near-term strategic priorities of margin improvement, sustainable free cash flow generation, and a net debt-to-EBITDA ratio of 2.0. As the bulk of WildHorse's current production consists of higher-margin oil, CHK expects its margins on a per-barrel of oil equivalent (BOE) basis following this deal to expand by 35% in 2019 and more than 50% by 2020.

Second, with this acquisition, CHK is expected to more than double its production by 2020. As CHK adds WildHorse's 420,000 oil-rich acres in the Eagle Ford Shale to its assets, nearly 80% to 85% of which is unexplored, it could transform CHK into an oil growth machine in the coming years.

Third, the “surprise” addition of WildHorse is expected to immediately boost CHK's financial profile along with future growth prospects. The increased scale of its operations, coupled with its ability to drill longer through its capital-efficient drilling mechanism, will help the company in yielding stronger drilling returns as well as eliminate additional oilfield service and supply chain costs.