Finally - After a Long Courtship, Gas-Focused Chesapeake and Southwestern Put a Ring On It

In a deal the energy industry had been whispering about for months, Chesapeake Energy and Southwestern Energy will combine to form what will be the largest natural gas producer in the U.S., with 7.3 Bcf/d of production in the Marcellus/Utica and the Haynesville and ready access to the Northeast and the LNG export market — assuming the merger passes muster with federal regulators. In today’s RBN blog, we discuss the merger and why it makes sense for both E&Ps. 

The surging upstream M&A market, which accelerated to an all-time record pace over the past six months, has stunned a lot of industry observers. The more than $200 billion in transactions over the past year and two weeks has included some surprising deals (Chevron acquiring Hess) and some competitive bidding wars (Occidental Petroleum winning CrownRock). But the latest deal — the longest-rumored and perhaps the most logical of all (think peanut butter and jelly) — is the merger of Chesapeake and Southwestern, the two largest Haynesville producers and major Appalachia operators. In today’s blog, we analyze this $11.5 billion marriage. 

According to Enverus, the total value of U.S. upstream M&A in 2023 was $192 billion — 79% higher than the previous all-time record (in 2014) and more than the previous three years combined. And the torrid pace, accelerated by Q4 purchases by ExxonMobil ($59.5 billion for Pioneer Natural Resources), Chevron ($53 billion for Hess), and Occidental ($12 billion for CrownRock), has continued into 2024. Last week, APA Corp. announced a deal to acquire Permian producer Callon Petroleum for $4.5 billion, just days before Chesapeake and Southwestern announced their combination.

First, let’s outline the basics of the deal:

• Chesapeake is acquiring Southwestern for $7.4 billion in stock, or $6.69/share based on Chesapeake’s closing price on January 10, 2024. The total transaction value is $11.5 billion, including the assumption of $4.1 billion in Southwestern debt. 
• Chesapeake shareholders will own 60% of the combined company and Southwestern shareholders will own 40%.
• The pro forma company will hold 1.18 million net acres in Appalachia and 650,000 net acres in the Haynesville Shale and over 15 Tcfe of proved developed producing reserves. Production of 7.3 Bcf/d (as of Q3 2023) will make it the largest U.S. gas producer and one of the largest gas producers globally.
• The combined company — which will have a new name to be announced later — will have 5,000 gross locations across the two plays with more than 15 years of inventory to feed growing domestic and international gas demand.

We’ll take a more detailed look at Chesapeake and Southwestern’s production assets — and the markets they sell their gas into — in a moment. But first we’ll look at their long and interesting backstories — each struggled mightily in the past but hung on, rebounded, and found the other.

Chesapeake, established in 1989 by flamboyant dealmakers Aubrey McClendon and Tom Ward, spent tens of billions accumulating mostly gas-focused acreage in multiple U.S. resource plays. Punished by falling natural gas prices as Shale Era production took off, the E&P sold $12 billion in assets in 2014-18 to shift its focus to crude oil, but falling commodity prices in late 2019 and the onset of the pandemic made it a penny stock that toppled into bankruptcy.