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Chesapeake Energy has agreed to buy Southwestern Energy in a $7.4bn all-share deal that will create the biggest US natural gas producer as a wave of merger and acquisition activity continues to sweep across the energy sector.
The combined company, with an enterprise value of about $24bn, will be by far the largest player in upstream US gas supply as it seeks to feed the surging demand for liquefied natural gas exports along the US Gulf coast.
“We combined to create an unmatched global natural gas company with the scale, asset quality, financial strength and people to create enormous value for shareholders while accelerating America’s energy reach,” said Nick Dell’Osso, Chesapeake chief executive.
The transaction marks the first big acquisition focused on natural gas since a deal frenzy kicked off in the US energy sector at the end of last year. Combined, the companies will produce about 7.4bn cubic feet of gas a day, according to S&P Capital IQ, overtaking the current number-one producer EQT, which produces about 5.4bn cu ft/d.
The company — which will be given a new name at the close of the deal — will combine Chesapeake and Southwestern’s assets in gas-rich Appalachia in the US north-east and the Haynesville Shale basin in Louisiana. Analysts said increased exposure to the latter was important given its proximity to the burgeoning LNG market on the Gulf.
US LNG exports have grown in importance since the war in Ukraine began, as Europe seeks to replace gas shipped by pipelines from Russia. About 10bn cu ft/d of LNG capacity is due to come online in the US over the next 36 months, according to consultancy Enverus.
“[The acquisition] is the biggest gas-focused US upstream deal in more than 10 years and reflects emerging confidence around the long-term outlook for the commodity,” said Andrew Dittmar, an analyst at Enverus.
Oklahoma-based Chesapeake offered $6.69 per Southwestern share. The combined company would be 60 per cent owned by existing Chesapeake shareholders on a diluted basis, with the remaining 40 per cent held by current Southwestern shareholders.
Dell’Osso will remain president and chief executive of the new company, with Chesapeake chair Mike Wichterich also staying in his role. The deal is expected to close in the second quarter, pending approval from regulators and shareholders.
Chesapeake was a prime mover in the shale revolution that has swept the US over the past 15 years, with its valuation rising to $35bn. But an ill-timed move into oil ultimately led to its bankruptcy when the Covid-19 pandemic crushed fuel demand in 2020. The company emerged from bankruptcy the following year and has since sought to refocus its portfolio on gas.
Less of a household name, Southwestern was formed in Arkansas ahead of the Great Depression. It played a leading role developing the Fayetteville shale basin in Arkansas and Oklahoma before expanding into Appalachia and the Haynesville in recent years.
Private equity group Kimmeridge, which owns stakes of just over 2 per cent in each company, was a leading proponent of Chesapeake’s shift in focus in recent years. The group said it was “highly supportive of the merger”.
“We believe it will be one of the few must-own stocks in the sector, especially as investors recognise the significance of a leading Haynesville position into a historic buildout of LNG export capacity along the Gulf Coast,” said Mark Viviano, managing partner at Kimmeridge.
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