A combination between Chesapeake Energy and Southwestern Energy would create a premier public shale gas E&P, experts say.

Oklahoma City-based Chesapeake Energy Corp. is reportedly in discussions with Spring, Texas-based Southwestern Energy Co. about a potential acquisition. The deal talks are preliminary and there’s no certainty the two E&Ps will reach a deal, Reuters reported.

A deal between the companies could be valued at more than $11 billion, including the assumption of debt.

Experts, by and large, think a deal between the two natural gas players would make sense. Analysts at Truist Securities said the combination would create an E&P with advantaged positions in shale drilling efficiencies and gas transportation.

The merged company could also better compete in the LNG sector expanding along the Gulf Coast.

Both companies already offload a significant amount of their gas production into the Gulf Coast market. Earlier this year, Chesapeake inked a 15-year LNG supply agreement with Gunvor Group Ltd.; Chesapeake will source gas from the Haynesville Shale for liquefaction and delivery to Gunvor beginning in 2027.

“With LNG contract discussions remaining front and center for most gas-focused E&P companies, this potential deal would transform the pro forma company to become the best positioned name in the group, in our view,” Truist Securities analysts said in an Oct. 17 report.

The two companies also have synergies between their respective geographic footprints. Chesapeake and Southwestern are the only two publicly traded gas producers with production in both the Haynesville and the Marcellus Shale.

The E&Ps have “considerable acreage overlap” in the Haynesville and “some degree of adjacency” in Appalachia, Capital One Securities analysts said Oct. 17.

However, a combination between the two gas companies—and the subsequent concentration of power in the Appalachian market—might present some regulatory challenges.

Fellow Appalachian gas producer EQT Corp. had its $5.2 billion acquisition of Tug Hill Inc. and XcL Midstream entangled in regulatory red tape for months as the Federal Trade Commission (FTC) worked to resolve antitrust concerns.

The FTC resolved its review of the EQT-Tug Hill deal in mid-August, and the deal closed days later.

“We don't know the percentage of market share at which the FTC begins to draw a line in the sand, but we have heard that 35% is as good a guess as any,” Capital One Securities analysts said. “We also aren't sure what exactly constitutes a market. Is it by county, or by basin, or across the country?”

Though the deal could potentially face regulatory hurdles, Capital One’s initial analysis indicates the deal would likely get greenlit.

If the price is right

If a deal comes together, analysts think there’s a good chance it could be an all-stock transaction. That was the case with Exxon Mobil Corp.’s blockbuster deal to acquire Permian Basin giant Pioneer Natural Resources in an all-stock transaction valued at nearly $60 billion.

Chesapeake acquiring Southwestern for a roughly $11 billion purchase price, or about $7 per share of Southwestern stock, would imply little to no premium takeout compared to Southwestern’s closing price of $6.77 per share on Oct. 16.

Analysts said they wouldn’t be surprised to see a final price closer to between $7.50 and $8 per share of SWN stock.

Chesapeake’s market capitalization is currently about $12 billion, while Southwestern’s market cap is around $8 billion. A combined company would sit around $20 billion.

“Only eight companies in our coverage group are larger by market cap,” Capital One Securities analysts said in an analyst report. “Among gas-focused peers, only [Coterra] would be larger at ~$21.5 billion.”

Holding for gas glory

Gas producers have been exposed to severe price volatility in the past year or so. Natural gas prices skyrocketed in 2022 due to a confluence of geopolitical and macroeconomic factors like Russia’s invasion of Ukraine and rapidly rising demand as the globe emerged from the doldrums of the COVID-19 downturn.

Natural gas prices spiked to more than $9/MMBtu last summer, according to data from the U.S. Energy Information Administration. Gas E&Ps raised output and chased high prices accordingly.

But natural gas prices have collapsed dramatically since then, fueled by oversupply, weakening demand and higher-than-average levels of storage inventory.

Henry Hub natural gas prices are expected to average $2.61 in 2023—down nearly 60% from an average of $6.42 last year, the EIA laid out in its most recent forecast.

Throughout this period of low prices, gas producers have kept their eyes fixated on the proverbial light at the end of the tunnel: rising demand from Gulf Coast LNG developers.

Gas demand to fuel U.S. LNG exports is forecasted to grow by 17.4 Bcf/d between 2023 and 2030, according to East Daley Analytics data. Total peak LNG export capacity in 2022 was about 13.9 Bcf/d, EIA figures show.

It’s such a huge amount of demand growth, some of the nation’s most adept gas producers wonder where all of that gas is going to come from.

That significant uptick in demand is expected to deliver a major lift to natural gas prices in the years to come and higher natural gas prices could fuel more M&A by gas-focused E&Ps.

“While oil has dominated headlines lately on the back of geopolitical concerns and Exxon Mobil Corporation’s acquisition of [Pioneer] last week, we would not be surprised with an increase in M&A on the natural gas side given the visibility to improved prices from LNG demand in 2025+,” said Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co.


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