Chesapeake Energy and Southwestern Energy announce $7.4bn merger

In a major shake-up in the energy industry, Chesapeake Energy Corporation (NASDAQ: CHK) and Southwestern Energy Company (NYSE: SWN) have announced a groundbreaking merger in an all-stock transaction valued at $7.4 billion. The deal, based on Chesapeake’s closing price on January 10, 2024, of $6.69 per share, signifies a strategic union in the natural gas sector.

Under the terms of the agreement, Southwestern shareholders will receive 0.0867 shares of Chesapeake common stock for each Southwestern share they own at closing. This union aims to forge a premier energy company, enriched with a leading natural gas portfolio adjacent to high-demand markets. The merged entity will assume a new name upon completion and is set to reshape the energy landscape.

The transaction highlights the establishment of the industry’s premier natural gas portfolio, combining high-quality, large-scale acreage in Appalachia and Haynesville. The merged company is expected to have a net production of approximately 7.9 Bcfe/d, with over 5,000 gross locations and a 15-year inventory.

The merger promises annual operational and overhead synergies of approximately $400 million, enhancing shareholder value through capital efficiencies and improved operating margins. This includes benefits from longer laterals, reduced drilling and completion costs, G&A reductions, and shared operational infrastructure.

Financially, the combination is set to be immediately accretive to all key per-share financial metrics, including operating cash flow, free cash flow, cash dividends, and net asset value, as well as return on capital employed (ROCE). This move is a strategic step towards creating a global platform for expanding the marketing and trading business. It aims to reach more markets, mitigate price volatility, and increase revenue, especially given the combined company’s scale of production, Investment Grade quality capital structure, and 100% certified Responsibly Sourced Gas.

The merger is anticipated to increase shareholder value through enhanced synergies and a best-in-class return framework. Chesapeake’s existing shareholder return framework suggests an approximate 20% improvement in dividends per share over five years, thanks to the merger’s synergies and greater pro forma free cash flow generation.

The combined company, committed to maintaining a net leverage ratio below one times and Investment Grade metrics, will benefit from a lower cost of capital and an improved credit profile. These attributes will boost access to and returns from marketing and LNG opportunities.

Sustainability is a key focus, with the combined company maintaining a low natural gas emissions profile and a commitment to achieving net zero Scope 1 and 2 GHG emissions by 2035. The merger includes transparent disclosure on measurable targets, investment in low-carbon solutions, and social and governance excellence.

Nick Dell’Osso, Chesapeake’s President and CEO, expressed his vision for the merger: “This powerful combination redefines the natural gas producer… 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.”

Bill Way, Southwestern’s President and CEO, also acknowledged the significance of the merger: “Together, Southwestern and Chesapeake can drive improved margins and returns from our highly complementary portfolios.”

Transaction details reveal that post-merger, Chesapeake shareholders will own approximately 60% and Southwestern shareholders about 40% of the combined company. The merger, approved by both companies’ boards of directors, is subject to customary closing conditions and is targeted to close in the second quarter of 2024.

The new company’s board will consist of 11 members, with a leadership team led by Nick Dell’Osso as President and CEO. The headquarters will be located in Oklahoma City, with a substantial presence in Houston, symbolizing a new era in the energy industry.