Chesapeake merger to form gas giant

All-stock deal with Southwestern Energy will create largest producer in the country

Chesapeake Energy and Southwestern Energy said Thursday they planned to merge in an all-stock transaction valued at $7.4 billion, creating a natural gas giant that would be the largest producer in the U.S. and a dominant player in the Haynesville shale region of East Texas and Louisiana.

Shareholders of Springbased Southwestern would receive 0.0867 shares of Chesapeake stock for each share of Southwestern outstanding at closing, which is expected during the second quarter. Chesapeake shareholders would own roughly 60% of the combined company and Southwestern shareholders would own 40%, they said in a filing with the Securities and Exchange Commission.

The combined company would not keep the famous name of Chesapeake, founded by the legendary and controversial shale pioneer Aubrey McClendon, who died in 2016 a day after he was indicted on federal bid-rigging charges. The companies said they would rebrand with a new name and would be headquartered in Oklahoma City, Okla.,though the company would keep “a material presence” in Houston and expand its marketing and trading business there.

The combination is the second major oil and gas merger of the year, the latest in a consolidation wave rippling across the Texas oil and gas sector as publicly held oil companies seek to expand their inventories through acquisition. The deal also positions both companies to capitalize on a new wave of liquefied natural gas facilities expected to feed gas supplies within the next six years.

“This powerful combination redefines the natural gas producer, forming the first U.S. based independent that can truly compete on an international

scale,” Chesapeake CEO Nick Dell’Osso said in a statement. “The world is short energy and demand for our products is growing, both in the U.S. and overseas. We will be positioned to deliver more natural gas at a lower cost, accelerating America’s energy reach and fueling a more affordable, reliable, and lower carbon future.”

Dell’Osso will become president and CEO of the resulting company. The company’s board would expand to 11 members, seven from Chesapeake and four from Southwestern. What role Southwestern CEO Bill Way would play in the resulting company was not specified Thursday.

In response to an analyst’s question about regulatory risk — antitrust regulators are scrutinizing megadeals proposed by Exxon and Chevron —Dell’Osso said “we’ll be ready to talk about that,” according to a transcript of a Thursday investor call provided by S&P Capital IQ. “We think that this is a great transaction for everyone involved and believe it should be something that is ready for the market to accept.”

The combined company’s status as the largest gas producer in the U.S. gives it more opportunity with investors, more profitability and more flexibility, said Dan Pickering, chief investment officer for Pickering Energy Partners.

“It’s a good blocking and tackling strategy that has the advantage of putting them on more radar screens,” he said.

The deal also makes the newly merged company a dominant player in the Haynesville region and cemented its role as “a supplier of choice” for LNG facilities along the Gulf Coast, said Alex Beeker, research director at Wood Mackenzie. Together they would own over 20% of Haynesville production and more than 600,000 acres. It also gives Chesapeake more than 15 years of Haynvesville inventory and the scale needed to serve LNG companies looking to line up long-term gas supply.

Chesapeake acquires 286,000 Haynvesville acres in the deal with roughly 1,300 drilling locations near the growing export market, said Andrew Dittmar, senior vice president of Enverus Intelligence Research.

“Enverus expects LNG to increase its share of U.S. gas demand from 12% to 20% in 2030 and account for the majority of future demand growth,” he said.