Chesapeake and Southwestern will create a US gas giant with a $7.4bn transaction

Chesapeake Energy agreed to purchase Southwestern Energy for $7.4bn in an all-share transaction. This will make the company the largest US natural gas producer.

With an enterprise value of approximately $24bn the combined company will be the largest US gas supplier upstream. It will also feed the surge in demand for LNG exports along the US Gulf Coast.

Nick Dell’Osso is the chief executive of Chesapeake. “We created an unmatched global gas company, with scale, asset-quality, financial strength, and people, to create immense value for shareholders, while accelerating America’s reach in energy,” he said.

This is the first major acquisition in the US natural gas sector since the deal frenzy that began at the end last year. According to S&P, the combined companies will produce 7.4bn cubic ft of gas a daily, surpassing the current number one producer EQT which produces about 5.4bn cft/d.

The new company, which will have a different name after the closing of the deal, will combine the assets of Chesapeake and Southwestern in the gas-rich Appalachia region in the US’s north-east and in the Haynesville Shale Basin in Louisiana. Analysts said that increased exposure to this basin was crucial, given its proximity to a burgeoning LNG industry on the Gulf.

Since the beginning of the war in Ukraine, US LNG exports has grown in importance as Europe seeks replacement gas shipped via pipelines from Russia. According to Enverus, the US will have 10bn cubic feet per day of LNG capacity in the next 36 month.

Andrew Dittmar is an analyst with Enverus. He said, “[The acquisition] represents the largest gas-focused US Upstream deal in over 10 years. It reflects the emerging confidence about the long-term prospects for the commodity.”

Oklahoma-based Chesapeake made an offer of $6.69 for each Southwestern share. On a diluted base, 60 percent of the combined company would belong to existing Chesapeake investors. The remaining 40 percent would belong to current Southwestern shareholders.

Dell’Osso, the current president and CEO of Chesapeake, will continue in that role. Mike Wichterich, the Chesapeake chairman, will also remain in his position. The deal should close by the end of the second quarter. This is subject to approval by regulators and investors.

Chesapeake played a major role in the US shale revolution, which has been sweeping the country for the past 15-years. Its valuation has reached $35bn. A bad decision to move into oil led to the company’s bankruptcy in 2020 when the Covid-19 pandemic halted fuel demand. After emerging from bankruptcy in the year following, the company has sought to refocus on its gas portfolio.

Southwestern, a name that is less familiar to the public, was founded in Arkansas before the Great Depression. Southwestern played a major role in developing the Fayetteville Shale Basin in Arkansas and Oklahoma, before expanding to Appalachia in recent years.

Kimmeridge Private Equity, which holds stakes in both companies of less than 2 percent, has been a major proponent in recent years of Chesapeake’s new focus. The group stated that it “strongly supports the merger”.

Mark Viviano said, “We think it will be one the few stocks that investors must own in the sector. This is especially true as they recognise the importance of a Haynesville leading position to a historic expansion of LNG export capability along the Gulf Coast.”