Chesapeake to buy Southwestern for more than $7 billion

Chesapeake Energy Corp., Oklahoma City, plans to pay about $7.4 billion for Southwestern Energy Co. to create a natural gas producer with daily production slightly larger than that of Chevron Corp. and Exxon Mobil Corp.

The proposed all-stock combination of Chesapeake and Southwestern will create an entity with more than 5,000 locations in Haynesville and Marcellus regions that today are producing about 7.9 bcfd. Chesapeake president and chief executive officer Nick Dell’Osso is slated to retain those roles at the merged company.

Speaking to analysts after announcing the deal, Dell’Osso noted the flexibility the company will have when it comes to managing its combined 1.2 million net acres in Appalachia and 650,000 acres in the Haynesville. The organization, he said, will be able to appropriately move around production and capital while having more than 25 sales points in the Northeast and along the Gulf Coast for its products.

The two companies’ teams have identified at least $400 million in possible annual cost savings, $130 million of which are expected to come from more efficient drilling and completion work.

“The opportunity to improve upon the overall access to infrastructure of this combined portfolio is tremendous,” Dell’Osso said. “How we market our gas is not assumed as a synergy here but it is an enormous opportunity and something we expect to deliver really significant value out of.”

Nick Pope at Seaport Research wrote Jan. 11 that “the deal makes strong operational and strategic sense” and estimates the two companies today account for about 40% of gross gas production in the Haynesville—combined, they are producing more than 4 bcf/d there—and nearly 20% of Appalachian production.

Becoming “LNG-ready” is a major element of this planned deal: Dell’Osso said plans call for 20% of the merged company’s production to be tied to the fast-growing LNG export market.

Analysts at Enverus Intelligence Research expect that roughly 10 bcfd of LNG export capacity will come online in the next 3 years and Andrew Dittmar, a senior vice-president at the firm, said LNG export growth “should tighten the gap between lower US natural gas prices and a stronger international market.”

The planned union of Chesapeake and Southwestern is expected to close by mid-year when its board of directors will grow to 11 members–seven from Chesapeake and four from Southwestern—and it will adopt a new name. The company will be headquartered in Oklahoma City but will retain “a material presence” at Southwestern’s main office in Houston.