Acquisitions and Divestitures

12 Months Ended

Dec. 31, 2021

Business Combination and Asset Acquisition [Abstract]

Acquisitions and Divestitures

ACQUISITIONS AND DIVESTITURES

GEP Haynesville, LLC Merger

On November 3, 2021, Southwestern entered into an Agreement and Plan of Merger with Mustang Acquisition Company, LLC (“Mustang”), GEP Haynesville, LLC (“GEPH”) and GEPH Unitholder Rep, LLC (the “GEPH Merger Agreement”). Pursuant to the terms of the GEPH Merger Agreement, GEPH merged with and into Mustang, a subsidiary of Southwestern, and became a wholly-owned subsidiary of Southwestern (the “GEPH Merger”). The GEPH Merger closed on December 31, 2021 and expanded the Company’s operations in the Haynesville.

Under the terms and conditions of the GEPH Merger Agreement, the outstanding equity interests in GEPH were cancelled and converted into the right to receive $1,269 million in cash consideration and 99,337,748 shares of Southwestern common stock. These shares of Southwestern common stock had an aggregate dollar value equal to approximately $463 million, based on the closing price of $4.66 per share of Southwestern common stock on the NYSE on December 31, 2021. In addition, the Company assumed GEPH’s revolving line of credit balance of $81 million as of December 31, 2021. This balance was subsequently repaid, and the GEPH revolving line of credit was retired on December 31, 2021. See Note 1 and Note 9 for additional information.

The GEPH Merger constituted a business combination, and was accounted for using the acquisition method of accounting. For tax purposes, the GEPH Merger was treated as a sale of partnership interests and an acquisition of assets. The following table presents the fair value of consideration transferred to GEPH equity holders as a result of the GEPH Merger:

(in millions, except share, per share amounts)	As of December 31, 2021
Shares of Southwestern common stock issued	99,337,748
NYSE closing price per share of Southwestern common shares on December 31, 2021	$	4.66
	$	463
Cash consideration	1,269
Total consideration	$	1,732

The following table sets forth the preliminary fair value of the assets acquired and liabilities assumed as of the acquisition date. Certain data and studies necessary to complete the purchase price allocation are still under evaluation, including, but not limited to, the final actualization of accrued liabilities and receivable balances and the valuation of natural gas and oil properties. The Company will finalize the purchase price allocation during the twelve-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.

(in millions)	As of December 31, 2021
Consideration:
Total consideration	$	1,732
Fair Value of Assets Acquired:
Cash and cash equivalents	11
Accounts receivable	171
Other current assets	3
Commodity derivative assets	56
Evaluated oil and gas properties	1,783
Unevaluated oil and gas properties	59
Other property, plant and equipment	2
Other long-term assets	3
Total assets acquired	2,088
Fair Value of Liabilities Assumed:
Accounts payable	170
Other current liabilities	1
Derivative liabilities	75
Revolving credit facility	81
Asset retirement obligations	24
Other noncurrent liabilities	5
Total liabilities assumed	356
Net Assets Acquired and Liabilities Assumed	$	1,732

The assets acquired and liabilities assumed were recorded at their preliminary estimated fair values at the date of the GEPH Merger. Acquired working capital amounts are expected to approximate fair value due to their short-term nature. The valuation of certain assets, including property, are based on preliminary appraisals. The fair value of acquired equipment is based on both available market data and a cost approach.

With the completion of the GEPH Merger, Southwestern acquired proved and unproved properties of approximately $1,783 million and $59 million, respectively, primarily associated with the Haynesville and Bossier formations. The remaining $2 million in Other property, plant and equipment consists of land, facilities and various equipment.

The income approach was utilized for unevaluated and evaluated oil and gas properties based on underlying reserve projections at the GEPH Merger date. Income approaches are considered Level 3 fair value estimates and include significant assumptions of future production, commodity prices, and operating and capital cost estimates, discounted using weighted average cost of capital for industry peers, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing adjusted for historical differentials. Cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.

The Company considered the borrowings under the revolving credit facility to approximate fair value as the balance on the GEPH revolving credit facility was immediately paid off after the GEPH Merger close. The value of derivative instruments was based on observable inputs, primarily forward commodity-price curves, and is considered Level 2.

Since the date of the GEPH Merger occurred on December 31, 2021, there were no revenues or operating income associated with the operations acquired recorded in the Company’s consolidated statements of operations for the year ended December 31, 2021.

Indigo Natural Resources Merger

On June 1, 2021, Southwestern entered into an Agreement and Plan of Merger with Ikon Acquisition Company, LLC (“Ikon”), Indigo Natural Resources LLC (“Indigo”) and Ibis Unitholder Representative LLC (the “Indigo Merger Agreement”). Pursuant to the terms of the Indigo Merger Agreement, Indigo merged with and into Ikon, a subsidiary of Southwestern, and became a wholly-owned subsidiary of Southwestern (the “Indigo Merger”). On August 27, 2021, Southwestern’s stockholders voted to approve the Indigo Merger and the transaction closed on September 1, 2021. The Indigo Merger established Southwestern’s natural gas operations in the Haynesville and Bossier Shales.

The outstanding equity interests in Indigo were cancelled and converted into the right to receive (i) $373 million in cash consideration, subject to adjustment as provided in the Indigo Merger Agreement, and (ii) 337,827,171 shares of Southwestern common stock. These shares of Southwestern common stock had an aggregate dollar value equal to approximately $1,588 million, based on the closing price of $4.70 per share of Southwestern common stock on the NYSE on September 1, 2021. Additionally, Southwestern assumed $700 million in aggregate principal amount of Indigo’s 5.375% Senior Notes due 2029 (the “Indigo Notes”) with a fair value of $726 million as of September 1, 2021, which were subsequently exchanged for $700 million of newly issued 5.375% Senior Notes due 2029. In addition, the Company assumed Indigo’s revolving line of credit balance of $95 million as of September 1, 2021. This balance was subsequently repaid, and the Indigo revolving line of credit was retired in September 2021. See Note 1 and Note 9 for additional information.

The Indigo Merger constituted a business combination, and was accounted for using the acquisition method of accounting. For tax purposes, the Indigo Merger was treated as a sale of partnership interests and an acquisition of assets. The following table presents the fair value of consideration transferred to Indigo equity holders as a result of the Indigo Merger:

(in millions, except share, per share amounts)	As of September 1, 2021
Shares of Southwestern common stock issued	337,827,171
NYSE closing price per share of Southwestern common shares on September 1, 2021	$	4.70
	$	1,588
Cash consideration	373
Total consideration	$	1,961

The following table sets forth the preliminary fair value of the assets acquired and liabilities assumed as of the acquisition date. Certain data and studies necessary to complete the purchase price allocation are still under evaluation, including, but not limited to, the valuation of natural gas and oil properties and the resolution of certain matters that the Company is indemnified for under the Indigo Merger Agreement for which not enough information is available to assess the final fair value of at this time. The Company will finalize the purchase price allocation during the twelve-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate.

(in millions)	As of September 1, 2021
Consideration:
Total consideration	$	1,961
Fair Value of Assets Acquired:
Cash and cash equivalents	55
Accounts receivable	192
Other current assets	2
Commodity derivative assets	2
Evaluated oil and gas properties	2,724
Unevaluated oil and gas properties (1)	684
Other property, plant and equipment	4
Other long-term assets	27
Total assets acquired	3,690
Fair Value of Liabilities Assumed:
Accounts payable (1)	274
Other current liabilities	55
Derivative liabilities	501
Revolving credit facility	95
Senior unsecured notes	726
Asset retirement obligations	8
Other noncurrent liabilities	70
Total liabilities assumed	1,729
Net Assets Acquired and Liabilities Assumed	$	1,961

(1)Reflects an $8 million purchase price adjustment due to ongoing valuation.

The assets acquired and liabilities assumed were recorded at their preliminary estimated fair values at the date of the Indigo Merger. Acquired working capital amounts are expected to approximate fair value due to their short-term nature. The valuation of certain assets, including property, are based on preliminary appraisals. The fair value of acquired equipment is based on both available market data and a cost approach.

With the completion of the Indigo Merger, Southwestern acquired proved and unproved properties of approximately $2,724 million and $684 million, respectively, primarily associated with the Haynesville and Bossier formations. The remaining $4 million in Other property, plant and equipment consists of land, water facilities and various equipment.

The income approach was utilized for unevaluated and evaluated oil and gas properties based on underlying reserve projections at the Indigo Merger date. Income approaches are considered Level 3 fair value estimates and include significant assumptions of future production, commodity prices, and operating and capital cost estimates, discounted using weighted average cost of capital for industry peers, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing adjusted for historical differentials. Cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.

The measurement of senior unsecured notes was based on unadjusted quoted prices in an active market and are Level 1. The Company considered the borrowings under the 2018 credit facility to approximate fair value as the outstanding Indigo revolving credit facility was immediately paid off after the Indigo Merger close. The value of derivative instruments was based on observable inputs, primarily forward commodity-price and interest-rate curves and is considered Level 2.

From the date of the Indigo Merger through December 31, 2021, revenues and operating income associated with the operations acquired through the Indigo Merger totaled $682 million and $472 million, respectively.

Prior to the Indigo Merger, in May 2021, Indigo closed on an agreement to divest its Cotton Valley natural gas and oil properties. Indigo retained certain contractual commitments related to volume commitments associated with natural gas

gathering, for which Southwestern will assume the obligation to pay the gathering provider for any unused portion of the volume commitment under the agreement through 2027, depending on the buyer’s actual use. As of December 31, 2021, up to approximately $36 million of these contractual commitments remain, and the Company has recorded a $17 million liability for the estimated future payments.

Excluding the Cotton Valley gathering agreement (discussed above), the Company has recorded additional liabilities totaling $74 million as of December 31, 2021, primarily related to purchase or volume commitments associated with gathering, fresh water and sand. These amounts will be recognized as payments are made over a period ranging from two to seven years.

Montage Resources Merger

In August 2020, Southwestern entered into an Agreement and Plan of Merger with Montage Resources Corporation (“Montage”) whereby Montage would merge with and into Southwestern, with Southwestern continuing as the surviving company (the “Montage Merger”). On November 12, 2020, Montage’s stockholders voted to approve the Montage Merger and it was made effective on November 13, 2020. The Montage Merger added to Southwestern’s oil and gas portfolio in Appalachia.

In exchange for each share of Montage common stock, Montage stockholders received 1.8656 shares of Southwestern common stock, plus cash in lieu of any fractional share of Southwestern common stock that otherwise would have been issued, based on the average price of $3.05 per share of Southwestern common stock on the NYSE on November 13, 2020.

In anticipation of the Montage Merger, in August 2020 Southwestern issued $350 million of new senior unsecured notes and 63,250,000 shares of common stock for $152 million after deducting underwriting discounts and offering expenses. The Company used the net proceeds from the debt and common stock offerings and borrowings under its 2018 credit facility to fund a redemption of $510 million aggregate principal amount of Montage's outstanding 8.875% senior notes due 2023 (the "Montage Notes") and related accrued interest in connection with the closing of the Montage Merger. See Note 1 and Note 9 for additional information.

The Montage Merger constitutes a business combination and was accounted for using the acquisition method of accounting. The following table presents the fair value of consideration transferred to Montage stockholders as a result of the Montage Merger:

(in millions, except share, per share amounts)	As of November 13, 2020
Shares of Southwestern common stock issued in respect of outstanding Montage common stock	67,311,166
Shares of Southwestern common stock issued in respect of Montage stock-based awards	2,429,682
	69,740,848
NYSE closing price per share of Southwestern common shares on November 13, 2020	$	3.05
Total consideration (fair value of Southwestern common shares issued)	$	213

The following table sets forth the fair value of the assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is complete as of the fourth quarter of 2021.

(in millions)	As of November 13, 2020
Consideration:
Fair value of Southwestern’s stock issued on November 13, 2020	$	213
Fair value of assets acquired:
Cash and cash equivalents	3
Accounts receivable	73
Other current assets	1
Derivative assets	11
Evaluated natural gas and oil properties	1,012
Unevaluated natural gas and oil properties (1)	100
Other property, plant and equipment	28
Other long-term assets	26
Total assets acquired	1,254
Fair value of liabilities assumed:
Accounts payable (1)	155
Other current liabilities	49
Derivative liabilities	70
Revolving credit facility	200
Senior unsecured notes	522
Asset retirement obligations	28
Other long-term liabilities	17
Total liabilities assumed	1,041
Net assets acquired and liabilities assumed	$	213

(1)Reflects a $10 million purchase price adjustment due to completion of valuation assessments during the measurement period.

The assets acquired and liabilities assumed were recorded at their fair values at the date of the Montage Merger. The valuation of certain assets, including property, are based on appraisals. The fair value of acquired equipment is based on both available market data and a cost approach.

With the completion of the Montage Merger, Southwestern acquired proved and unproved properties of approximately $1,012 million and $100 million, respectively, primarily associated with the Appalachian basin. The remaining $28 million in Other property, plant and equipment consists of a gathering system, buildings and various equipment.

Unevaluated oil and gas properties were valued primarily using a market approach based on comparable transactions for similar properties. The income approach was utilized for proved oil and gas properties based on underlying reserve projections at the Montage Merger date. Income approaches are considered Level 3 fair value estimates and include significant assumptions of future production, commodity prices, and operating and capital cost estimates, discounted using weighted average cost of capital for industry peers, and risk adjustment factors based on reserve category. Price assumptions were based on observable market pricing adjusted for historical differentials. Cost estimates were based on current observable costs inflated based on historical and expected future inflation. Taxes were based on current statutory rates.

Deferred income taxes represent the tax effects of differences in the tax basis and merger-date fair values of assets acquired and liabilities assumed. A full valuation was placed on all deferred tax assets assumed from Montage consistent with the Company’s treatment of its deferred tax asset balance as of December 31, 2020. The measurement of senior unsecured notes was based on unadjusted quoted prices in an active market and are primarily Level 1. The Company considered the borrowings under the 2018 credit facility to approximate fair value as the outstanding Montage revolving credit facility was immediately paid off after the Montage Merger closed. The value of derivative instruments was based on observable inputs, primarily forward commodity-price and interest-rate curves and is considered Level 2.

From the date of the Montage Merger through December 31, 2020, revenues and the net income attributable to common stockholders associated with the operations acquired through the Montage Merger totaled $63 million and $28 million, respectively.

Pro Forma Information

The following table summarizes the unaudited pro forma condensed financial information of Southwestern as if the Montage Merger had occurred on January 1, 2019, and the Indigo Merger and the GEPH Merger each had occurred on January 1, 2020:

	For the years ended December 31,
(in millions, except per share amounts)	2021 (1)		2020		2019
Revenues	$	8,301	$	3,836	$	3,673
Net income (loss) attributable to common stock	$	(354)	$	(3,243)	$	995
Net income (loss) attributable to common stock per share – basic	$	(0.32)	$	(2.92)	$	1.48
Net income (loss) attributable to common stock per share – diluted	$	(0.32)	$	(2.92)	$	1.48

(1)The year ended December 31, 2021 includes the actual operating results from the Montage Merger, which occurred in November 2020.

The unaudited pro forma information is not necessarily indicative of the operating results that would have occurred had the Montage Merger been completed at January 1, 2019, and the Indigo Merger and the GEPH Merger each been completed at January 1, 2020, nor is it necessarily indicative of future operating results of the combined entities. The unaudited pro forma information gives effect to the Mergers and any related equity and debt issuances, along with the use of proceeds therefrom, as if they had occurred on the respective dates discussed above and is a result of combining the statements of operations of Southwestern with the pre-merger results of Montage, Indigo and GEPH, including adjustments for revenues and direct expenses. The pro forma results exclude any cost savings anticipated as a result of the Mergers, and include adjustments to DD&A (depreciation, depletion and amortization) based on the purchase price allocated to property, plant, and equipment and the estimated useful lives as well as adjustments to interest expense. Interest expense was adjusted to reflect any retirement of assumed senior notes, credit facilities, all related accrued interest and the associated decrease in amortization of issuance costs related to notes retired and revolving lines of credit. These decreases were partially offset by increases in interest on debt associated with the issuance of $350 million in 8.375% Senior Notes due 2028 related to the Southwestern debt offering and borrowings under Southwestern’s credit facility used to pay off the Montage notes, Montage credit facility and related accrued interest. Interest expense was also adjusted to include the impact of the assumption and exchange of Indigo’s $700 million of 5.375% Senior Notes due 2029 for equivalent Southwestern senior notes and to reflect the retirement of the Montage, Indigo and GEPH credit facilities, all related accrued interest and the associated decreases in amortization of issuance costs related to the respective revolving lines of credit. Management believes the estimates and assumptions are reasonable, and the relative effects of the three Mergers are properly reflected.

Merger-Related Expenses

The following table summarizes the merger-related expenses incurred for the years ended December 31, 2021 and 2020:

	For the years ended December 31,
	2021								2020
(in millions)	Indigo Merger		GEPH Merger		Montage Merger		Total		Montage Merger
Professional fees (bank, legal, consulting)	$	27	$	19	$	1	$	47	$	18
Representation & warranty insurance	4		7		—		11		—
Contract buyouts, terminations and transfers	7		1		—		8		5
Due diligence and environmental	3		1		—		4		—
Employee-related	2		—		1		3		17
Other	2		—		1		3		1
Total merger-related expenses	$	45	$	28	$	3	$	76	$	41

2019 Divestitures

During 2019, the Company sold non-core acreage for $38 million. There was no production or proved reserves associated with this acreage. In addition, during July 2019, the Company sold the land associated with its headquarters office building for $16 million and recognized a $2 million gain on the sale. The Company also from time to time sells leases and other properties whose value, individually, is not material but is reflected in the Company’s financial statements.