Chesapeake and Southwestern Energy to Merge

Chesapeake Energy Corporation and Southwestern Energy Company recently announced in a joint statement that they have entered into an agreement to merge in an all-stock transaction valued at $7.4 billion, or $6.69 per share, based on Chesapeake’s closing price on January 10, 2024.

Under the terms of the deal, Southwestern shareholders will receive a fixed exchange ratio of 0.0867 shares of Chesapeake common stock for each share of Southwestern common stock owned at closing, the statement noted, adding that, at this exchange ratio and the respective share prices on January 10, 2024, the combined company would have an enterprise value of approximately $24 billion.

Pro forma for the transaction, Chesapeake shareholders will own approximately 60 percent and Southwestern shareholders will own approximately 40 percent of the combined company, on a fully diluted basis, the statement said.

The companies noted in the statement that the strategic combination will create a premier energy company underpinned by a leading natural gas portfolio adjacent to the highest demand markets, premium inventory, resilient free cash flow, and an investment grade quality balance sheet. The deal is accretive to all key financial metrics, the companies outlined in the statement.

The statement also revealed that the combined company will assume a new name at closing and that its board of directors will increase to 11 members and will initially be comprised of seven representatives from Chesapeake and four representatives from Southwestern. 

Mike Wichterich will serve as Non-Executive Chairman and Nick Dell’Osso as President and Chief Executive Officer of the combined company, according to the statement, which noted that the combined business will be headquartered in Oklahoma City “while maintaining a material presence in Houston”.

The combination has been approved by the boards of directors of both companies, the statement revealed. The transaction, which is subject to customary closing conditions, including approvals by Chesapeake and Southwestern shareholders and regulatory clearances, is targeted to close in the second quarter of 2024, the statement added.

“This powerful combination redefines the natural gas producer, forming the first U.S. based independent that can truly compete on an international scale,” Dell’Osso said in the statement.

“The union creates a deep inventory of advantaged assets adjacent to high demand markets, allowing for the application of proven operational practices and the power of an investment grade quality balance sheet to drive significant synergies benefiting energy consumers and shareholders alike,” he added.

“The world is short energy and demand for our products is growing, both in the U.S. and overseas. We will be positioned to deliver more natural gas at a lower cost, accelerating America’s energy reach and fueling a more affordable, reliable, and lower carbon future,” he continued.

“I look forward to leading the talented workforce of the combined organization to accelerate the long-term value opportunity for our shareholders, employees, and all stakeholders,” Dell’Osso went on to state.

Southwestern President and Chief Executive Officer Bill Way said in the statement, “I want to thank the entire Southwestern team for positioning the company to be part of this transformational combination”.

“Together, Southwestern and Chesapeake can drive improved margins and returns from our highly complementary portfolios through enhanced scale, capital allocation flexibility, and access to premium markets to supply growing global natural gas demand,” he added.

“Most importantly, both sets of shareholders are able to participate in the substantial value creation and future growth opportunities of the combined company, with one of the top shareholder return frameworks in the sector,” Way went on to state.

Biggest Gas-Focused USA Upstream Deal in 10+ Years

In a statement sent to Rigzone, Andrew Dittmar, a Senior Vice President at Enverus Intelligence Research, said, “Chesapeake’s $11.5 billion acquisition of Southwestern (including debt) is the biggest gas-focused U.S. upstream deal in more than 10 years and reflects emerging confidence around the long-term outlook for the commodity”.

“With its modest premium and increased exposure to the Haynesville by adding Southwestern’s high-quality acreage, plus financial accretion, the acquisition looks like a winning deal for Chesapeake,” Dittmar added.

In the statement, Dittmar said Chesapeake is likely buying Southwestern in large part to add its 286,000 net acres in the Haynesville in Louisiana.

“The acreage contains about 1,300 gross operated drilling locations capable of generating a 10 percent return at $3.50/Mcf gas pricing or less,” he noted.

“Combined Chesapeake and Southwestern will be the largest producer in the Haynesville with over 4 Bcf/d gross operated production, and the largest gas producer in the U.S., jumping EQT,” he added.

The Haynesville is particularly desirable as an area for Chesapeake to grow its exposure as the play combines high-quality drilling opportunities with proximity to a burgeoning market for gas to feed U.S. LNG exports, Dittmar noted.

“Enverus expects LNG to increase its share of U.S. gas demand from 12 percent to 20 percent in 2030 and account for the majority of future demand growth,” he said in the statement.

“There is about 10 Bcf/d of increased LNG export capacity coming online in the next 36 months that should tighten the gap between lower U.S. natural gas prices and a stronger international market,” he added.

While the longer-term outlook for gas prices is good, in the near term the market is likely to remain challenged as supply outstrips demand and storage fills, Dittmar said in the statement.

“Low and volatile gas prices have been a significant hinderance to gas M&A, with just about $6 billion in gas-focused deals transacted in 2023 compared to a massive $186 billion of oil-weighted M&A,” he stated.

“Chesapeake’s use of stock in the deal, as compared to a cash buyout, helps reduce the commodity price risk for the buyer while allowing the seller to participate in upside. Overall, as an LNG-influenced rise in gas prices near, there should be more enthusiasm from buyers to offer higher prices for assets and companies and drive more gas-weighted M&A,” he added.

“It is a bit surprising to see such a modest premium, just five percent over where Southwestern was trading before rumors of an imminent deal emerged … [January 5], and less than Southwestern’s prior-day close,” he continued.

“Chesapeake was trading at a premium valuation to Southwestern at 5.5x EBITDA versus 4x and also has a lower free cash flow yield. That allows the company to keep the deal financially accretive, a key requirement from investors, while also adding the inventory,” Dittmar went on to state.

Investor Consensus

In a BofA Global Research report sent to Rigzone recently, analysts at the company said, “since speculation of a merger between Chesapeake and Southwestern Energy first emerged last year, we believe investor consensus overwhelmingly supported the logic”.

“With the deal announced, we see the yet to be renamed NewCo amongst the most attractive rate of change opportunities among U.S. E&Ps, led by transparent synergies that we think have upside potential,” they added.

“Critically, we see the combined company as the best route to position for what we view as a material change in U.S. natural gas dynamics. We reiterate our Buy rating on CHK, PO to $120/sh which excludes any upside from SWN pending completion - expected 2Q24, subject to shareholder approvals,” the analysts continued.

In that report, the BofA Global Research analysts stated that they continue to believe the dynamics of U.S. natural gas markets are on the cusp of significant change as LNG demand raises the incremental clearing price for U.S. gas.

“At a current forward curve holding around $4.00/mcf, we have discussed our view that the broader gas E&P sector is undervalued,” they added.

“With CHK’s acquisition of SWN, we see its successful completion resetting the combined companies cost base, enhancing free cashflow with upside to declared synergies differentiating the investment case vs peers,” they continued.

To contact the author, email andreas.exarheas@rigzone.com