Rumors are swirling that Chesapeake Energy is on the hunt for large-scale M&A. But executives say Chesapeake doesn’t feel forced to ink a deal anytime soon.

Oklahoma City-based Chesapeake Energy Corp. has reportedly held discussions about a potential acquisition of Spring, Texas-based Southwestern Energy Co.

Analysts say such a combination would create a premier public shale gas producer, with assets across both the Marcellus and Haynesville shale plays.

But Chesapeake executives were mum on specifics during the natural gas company’s third-quarter earnings call.

“We certainly don't feel compelled to do anything on [a] near-term timetable,” said Nick Dell'Osso, Chesapeake’s president and CEO, during the call. “But at the same time, we believe in consolidation.”

Chesapeake has a laundry list of non-negotiables it looks for when pursuing M&A, Dell'Osso said—including not overpaying for a deal, driving valuable accretion through a transaction, protecting its balance sheet and finding assets with a favorable emissions profile.

“What that really means, at the end of the day, is that you have to make your company better through consolidation—not just bigger,” he said.

Chesapeake also isn’t opposed to expanding into new basins, but the company likes the places it already has large footprints in. The company sees the Marcellus and Haynesville positioned “at the top of the heap for natural gas supply and demand fundamentals”—and able to deliver against those fundamentals for years to come, Dell'Osso said.

Chesapeake Marcellus
Chesapeake sells half of its Marcellus gas production in-basin and half to out-of-basin markets. (Source: Chesapeake investor presentation)

It would take a particularly sweet deal to lure Chesapeake into a new gas play.

“If you wanted to apply those non-negotiables to a place we don't operate today, that bar is even higher,” he said.

Outside of deal talks with Southwestern, analysts at Truist Securities said they expect that Chesapeake is also having conversations with other E&Ps for either acquisitions or joint ventures.

One potential opportunity singled out during the analyst call: European major BP’s portfolio in the Haynesville Basin. Chesapeake CFO Mohit Singh—who joined Chesapeake after working for BP’s U.S. onshore subsidiary, BPX Energy—agreed that BP’s Haynesville position “is very competitive.”

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‘Be LNG ready’

Chesapeake divested its final pieces of acreage in the Eagle Ford Shale earlier this year as part of a strategic transition into being a pure-play natural gas producer.

The company exited the Eagle Ford across three separate deals with SilverBow Resources, INEOS Energy and WildFire Energy this year. The sales generated proceeds of more than $3.5 billion.

With domestic natural gas demand expected to skyrocket to fuel new U.S. LNG export capacity coming online in the next few years, Chesapeake is positioning itself to “be LNG ready.”

Alongside its third-quarter earnings, Chesapeake announced entering into a long-term LNG supply heads of agreement (HOA) with global commodities trader Vitol Inc.

Chesapeake will supply up to 1 million tonnes per annum (mtpa) of LNG to Vitol for 15 years, with purchase prices linked to the international Japan Korea Marker (JKM).

The two companies plan to jointly select “the most optimal liquefaction facility” in the U.S. to super-chill the Haynesville gas produced by Chesapeake.

Earlier this year, Chesapeake entered into a long-term LNG supply agreement with commodities trader Gunvor Singapore Pte Ltd. Chesapeake will supply Energy Transfer’s Lake Charles LNG facility enough gas to produce up to 1 mtpa of LNG which, after liquefaction, would be purchased by Gunvor at JKM-indexed prices over 15 years.

“Our approach to executing our LNG strategy has been consistent and benefits from production that is physically linked to LNG markets, access to international prices and downside protection through cancellation optionality,” Dell'Osso said.

Chesapeake Haynesville

Chesapeake believes its Haynesville gas production is well-positioned to capitalize on growing gas supply demand by Gulf Coast LNG projects. (Source: Chesapeake investor presentation)

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. Total peak LNG export capacity in 2022 was about 13.9 Bcf/d, according to Energy Information Administration data.

It’s such a huge amount of demand growth, even some of the nation’s most adept producers have wondered how the gas will be supplied.

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Ground game

Chesapeake’s third-quarter average production came in at an equivalent of 3.495 Bcf/d (97% natural gas; 3% total liquids). The company used an average of nine rigs to drill 35 wells in the third quarter—down from 53 wells drilled the quarter before.

So far this year, Chesapeake has added 34,000 additional net lease acres in the Marcellus and Haynesville plays at an average cost of $1,500 per acre.

Chesapeake is currently running nine rigs and three completion crews—four rigs and two crews in the Marcellus, and five rigs and one crew in the Haynesville.

The company plans to continue at its current rig cadence in the Marcellus and Haynesville heading into the first part of 2024, Dell'Osso said.