Chesapeake-Southwestern Energy deal: ten key takeaways
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On 11 January 2024 Chesapeake Energy announced it would be combining with Southwestern Energy. This long-rumoured deal in some ways parallels ExxonMobil’s recent blockbuster purchase of Pioneer, and creates a US$24 billion company that will be the biggest player in US shale gas.
Using data and intelligence gathered from various Wood Mackenzie products including North America Gas Service, LNG Service & Tool,Corporate Strategy & Analytics Service and Lower 48 Upstream Service, we dive into the deal in more detail. Read on to get an overview of the key takeaways, and sign up to receive more of our Gas & LNG content.
1. This is a big deal
The US$7.4 billion equity deal creates a combined company with an enterprise value of US$24 billion including Southwestern’s US$4 billion of debt. Initial combined production will be a whopping 7.9 billion cubic feet per day (bcfd), split between the Haynesville (42%) and Marcellus (58%) fields. That will make the new firm the largest US Lower 48 pure-play gas producer, beating EQT into second place on production, market capitalisation and enterprise value metrics. It will also be one of the largest upstream gas producers globally, just behind the majors. In fact, on the announcement call, Chesapeake talked about its massive new scale putting it in a good position for inclusion in the S&P500.
2. It’s good for the whole Haynesville play
Gas-focused equities have been trading at a significant discount in the market. This is partly due to fear of Permian-related oversupply, but also because of uncertainty around elastic new drill supply responses to price improvement. Thanks to this deal, investors can now look to a single exploration and production firm to better understand development cadence, inventory longevity, evolving cost of supply, step-out appraisal work and optimised infrastructure for the Haynesville.
3. It reinforces Chesapeake’s focus on low-carbon gas and LNG
Since emerging from bankruptcy in 2021, Chesapeake has successfully narrowed its focus towards low-carbon gas and LNG. The company sold its Powder River and Eagle Ford assets when demand for oil properties was strong and prices were recovering. It also added strategic bolt-on positions in the Marcellus and Haynesville fields to offset these sales, through the acquisitions of Vine Energy and Chief Oil & Gas.
4. It creates serious synergies
Both Chesapeake and Southwestern have a nearly 50/50 portfolio split between the Marcellus and Haynesville fields. Lower general and administrative costs, lease operating expenses and oilfield equipment and services pricing will create a clear competitive advantage for the combined business. Chesapeake signalled US$400 million of annual savings, mainly through drilling and completion improvements: faster drilling, longer laterals and better optimisation of spend vis-à-vis peak flow rates.
5. It could meaningfully extend Chesapeake’s runway
Multi-decade inventory depth along the Gulf Coast is truly a differentiator among US gas producers. Prior to the deal, Chesapeake’s post-2030 inventory looked light given its long-term LNG ambitions. Southwestern had been running seven rigs to Chesapeake’s four – depending on how the combined company allocates rigs to Southwestern’s acreage longer-term, runway could be extended meaningfully, to 15+ years.
6. The combined business is well-positioned for Gulf Coast LNG
As well as longevity, creditworthiness is essential to support long-term agreements in LNG. By adding Southwestern’s scale, Chesapeake improves cashflow reliability and moves toward an investment grade credit rating. With methane emissions globally coming under increasing scrutiny, having lower-carbon, 100% certified gas will also help. Post-deal, the new firm should be able to cement itself as a supplier of choice to US Gulf Coast LNG seeking international pricing. Prior guidance from Chesapeake included a strategy to monetise up to 20% of production through the global market (it already has 0.4 bcfd of supply tied to the Platts Japan Korea Marker (JKM) gas price under two heads of agreement with LNG buyers).
7. The deal should help Marcellus field efficiency too
In capacity-constrained Appalachia, having adjacent leases arguably delivers more material benefits than in Louisiana. Larger surface footprints and shared egress agreements will provide extra dedicated takeaway. Larger lease corridors also minimise lease operating expenses, helping to offset the lower price for gas produced in the region. Across the whole portfolio, the new company will connect to more than 25 diversified sales points and will have better access to new Lower 48 infrastructure investments.
8. Asset familiarity adds further upside
Some of Southwestern’s Haynesville and Marcellus assets previously belonged to Chesapeake, so in a way the leases are coming home. The deal should bring a powerful combination of new-plus-experienced thinking to project design. As a result, future cost-efficiency metrics will shine.
9. It creates some price risk to targets
The combined company is maintaining its commitment to stay below 1.0x net leverage. Assuming a benchmark Henry Hub gas price of US$3.0 per thousand cubic feet (mcf), it has a plan to reach that level within one year of the deal closing. By our estimates, assuming consistent activity levels and Henry Hub prices rising to US$3.65/mcf in 2024 and US$4.10/mcf in 2025, the combined business will generate US$2.3 billion of free cash flow over the next two years. However, if higher prices don’t materialise, the firm could struggle to reach its target of reducing its debt by US$1.1 billion by 2025 without resorting to asset sales (none were announced with the deal).
10. Expect further consolidation in US gas
Overall, this deal is about creating a better company in every respect. In doing so, it raises the bar on portfolio mix, cost of supply, scale, integration and environmental stewardship for the wider US gas sector. We’ve been calling for M&A in the Haynesville field since 2022. With this merger following hot on the heels of TG’s purchase of Rockcliff, over three billion cubic feet of Ark-La-Tex gas assets have changed hands in less than a month. Both deals involve firms with exposure to the US LNG export market, underlining how global gas strategies are spurring interest in US shale gas. We expect others to follow.