In the wider scheme of the U.S. oil and gas industry, the recently announced merger of Chesapeake EnergyCHK
and Southwestern EnergySWN
may not be the biggest in valuation stakes. That’s especially considering how Q4 2023 went.
The last quarter saw ExxonMobil announce an agreement to acquire Pioneer Natural Resources for around $59.5 billion on October 11. A mere 12 days later, rival Chevron unveiled its deal to acquire Hess Corp. for around $53 billion. Then in December, Occidental Petroleum acquired CrownRock for nearly $11 billion. And these weren’t the only consolidation moves in the industry.
By comparison, Southwestern was valued at approximately $7.4 billion, or $6.69 per share, based on Chesapeake’s closing price on January 10, 2024. Southwestern shareholders will receive 0.0867 shares of Chesapeake common stock for each share of Southwestern common stock outstanding at closing under the terms of the merger agreement.
Chesapeake and Southwestern shareholders will own approximately 60% and 40% of the combined firm, respectively. The deal is expected to close in Q2 2024, pending regulatory and shareholders’ approval. Following the merger, the combined company will increase its board to 11 members, initially comprised of 7 representatives from Chesapeake and 4 representatives from Southwestern.
Mike Wichterich will serve as Non-Executive Chairman and Nick Dell’Osso as President and Chief Executive Officer of the combined company. It will be headquartered in Oklahoma City, whilst maintaining a strong material presence in Houston.
And oh, do expect a new name upon the close of the transaction thereby ending the Chesapeake brand, almost 35 years after the company’s founding by wildcatters Tom Ward and the late Aubrey McClendon.
But the sheer numbers tell their own story. According to Chesapeake’s Dell’Osso and law firm Kirkland & Ellis (who advised Southwestern Energy), the combined corporate entity would have an enterprise value of approximately $24 billion.
The figure roughly tallies with closing share prices of the new natural gas bedfellows on January 10, 2024. Even if market volatility and fortunes of the natural gas market knock a billion or two off the valuation upon the expected debut of the merged company, it will still be an international, and not just a U.S., energy behemoth.
A new American natural gas champion?
The merged entity will dwarf rival and current natural gas industry leader EQT Corporation’s market capitalization of $14.84 billion, as of Wednesday (January 17, 2024), by some distance to become the largest independent U.S. natural gas producer.
But the development isn’t just about bragging rights on who is bigger. The merged entity will have the U.S.’s “premier natural gas portfolio.” This does stand up to scrutiny with a combined net production tally of nearly 8 billion cubic feet per day, supported by claims of 15 years of inventory sourced from “large scale acreage in Appalachia and Haynesville.”
For symbolism, the $24 billion natural gas market leader will likely debut in the same year which has seen the U.S. overtake Qatar to become the world’s largest exporter of liquefied natural gas (LNG).
Doubtless, the combined company’s “global marketing and trading presence in Houston to supply lower-cost, lower carbon energy to meet increasing domestic and international LNG demand” will be geared up for it and make it “LNG-ready.”
In fact, in a recent call with analysts, Dell’Osso said the new company expects up to 20% of its future production to be tied to international pricing. Shareholders can also expect a 20% increase in dividends due to “significant synergies” and an increase in free cash flow generation over the next 5 years.
Markets are also being promised an “investment grade quality” capital structure, a far cry from Chesapeake’s bankruptcy protection in 2020, something it emerged from a year later. Finally, there’s also a commitment to achieving net zero Scope 1 and 2 greenhouse gas (GHG) emissions by 2035.
Whichever way you look at it, “Big Gas” Inc. will soon have a new player in town – an as yet unnamed colossal independent producer created by Chesapeake Energy and Southwestern Energy.
