(Adds analyst comment; updates share price)
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 valued at 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 the 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," the company's 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 nearly 3 percent to $5.46 following the announcement.
Investors were disappointed that Southwestern earmarked only about half of the proceeds to repay debt, with $600 million to be used to expand production despite low natural gas prices, Scott Hanold, an analyst at RBC Capital Markets, said.
"There was some hope the transaction would result in lower leverage, but the reality is the leverage metrics don't change too much," Hanold said. "That could imply the company will outspend cash flow."
Hanold said investors want to see Southwestern's ratio of debt-to-earnings before interest, taxes, depreciation and amortization - a financial yardstick often used to evaluate the health of an energy exploration and production company - decline to 2-to-1, down from the current 2.7-to-1.
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 will have $2.3 billion in debt after the deal closes in December. "Our goal is to have a self-funding Appalachia business as we complete 2020," Way said.
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 Jeffrey Benkoe and Leslie Adler)